Macro4Micro: Fed Funds & Inflation

JOLTS March 2026: Openings Down, Hires Up, Layoffs/Discharges Up 5-5-26

Producer Price Index April 2026: Heat Rising on Cost Inputs

Glenn Reynolds, CFA — Wed, 13 May 2026 19:01:48 GMT

The cost inputs for producer pricing strategies are starting to flow into goods and services in a bigger way even if at a lag that will keep playing out subject to Iran War fallout, tariff effects, and labor expectations as “real wages” take a pummeling on rising CPI and PCE (see CPI April 2026: 4.1% All Items Less Shelter, 30Y UST 5% 5-12-26, PCE Inflation, Income & Outlays March 2026: Inflation Anxiety Level? 5-3-26).
The sharp upward moves along many PPI lines – especially since March – tell a story of either higher prices ahead or eroding profit margins unless the “magic pill” of AI can offset the effects (see Producer Price Index March 2026: Heater or Curve Ball? 4-14-26). April PPI posted the kind of moves you cannot dance around. The UST curve action has been restrained, but FedWatch odds have shifted notably against easing of late with “hike odds” rising. “No change” is still the heavy favorite in calendar 2026.
Whether you believe PPI is a reliable leading indicator or not, the logic of inflationary pressures ahead in goods and services shown in CPI/PCE metrics is a well-traveled conceptual path. The MoM move of +1.4% is double March while the 6.0% YoY is up from +4.3% (revised) in March.
The +1.4% increase in Final Demand was the highest since March 2022 and the 1.2% increase in Final Demand Services MoM was the highest since March 2022. Any time the comparisons are made to 2022, it is a bad thing. Then again, personal consumption and payrolls were strong in 2022 and a recession was avoided. The tests are still in the consumer sector, corporate earnings, and hiring (see Employment Situation: April 2026 5-8-26, JOLTS March 2026: Openings Down, Hires Up, Layoffs/Discharges Up 5-5-26).

The time series above posts the PPI index level for Final Demand, and April is running at 6.0% or 3x the long-term median. That can only be seen as a negative. The theory is that will flow into PCE inflation levels and will send Warsh to the local hardware store for a high volume “mean trimmer” as the FOMC plot thickens. Changing the data strategy will not change the prices of goods and services.

The chart shows a PPI rise to 3.8% in January 2025 with a dip that followed before the inexorable rise into 2026. The move to 6.0% YoY in April from 4.3% (revised) in March, 3.4% in February, and 3.1% (revised) in January sure looks like a trend. That rise is not to be taken lightly. The market was looking at 2% handles in 2Q25.

The 6.0% YoY level is the highest since Dec 2022. Some will lay off April PPI on energy, but there is no shortage of line items outside energy in the data-intensive PPI release signaling setbacks. Final Demand Core PPI of 5.2% is up from the 3.8% reported in March.

The above table breaks out some of the important metrics in PPI we monitor plus a few smaller line items we like to watch (Construction, Private Capital Equipment). The YoY column tells a story of inflationary trends and the March to April numbers are on balance moving in a distinctly negative direction.

The equity and bond market reaction was relatively muted, but the 2Y UST has been climbing over the trailing month and 6M period. That said, the 2Y UST is 3.99% today as we post vs. a 3.99% open. The 10Y at 4.48% as we go to print is a minimal move from the 4.47% open. In contrast, the “Vegas line” over at FedWatch seems to be wiping out odds of a cut in 2026. Those probabilities are essentially telling Warsh to “brace for impact” (Truth Social impact that is).

The FedWatch odds of a cut by the Dec FOMC meeting is now down to 1% with a 64% chance of unchanged fed funds by then and a 30% chance of 1 hike. The odds of a hike were less than 1% a month ago. Looking out to the next April (2027) FOMC meeting, the odds of unchanged by then is 42%, 1 hike is 39%, and 2 hikes is 15%. The odds of 1 cut at a 325-350 bps range is less than 1%.

For today, the fact that the Strait of Hormuz remains closed and negotiations are stalled with Trump in China (and seemingly detached from hopes of Iran progress) has not helped those odds. The PPI trend lines remind us that energy costs, tariffs, and producer pressures to protect margins will flow into inflation unless demand takes a major hit. The 1Q26 earnings season did not signal broad weakness in the economy and payrolls have been steadier. That means pricing power is still there for many as producers face tariffs (in whatever form they end up taking) and the Iran cost effects get felt directly and indirectly in the economy.

Market Commentary: Asset Returns 5-10-26

Employment Situation: April 2026 5-8-26

New Home Sales March 2026: Favorable Volume, Weaker Prices 5-5-26

PCE Inflation, Income & Outlays March 2026: Inflation Anxiety Level? 5-3-26

1Q26 GDP Advance Estimate: Consumer Fade, Investment Boom 4-30-26

Synchrony Financial: Favorable Consumer Credit Signals 4-24-26

Industrial Production March 2026: Mixed Picture, Big Questions Ahead 4-16-26

Existing Home Sales March 2026: New Beginnings or New Ends? 4-15-26

Producer Price Index March 2026: Heater or Curve Ball? 4-14-26

4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26

The US as an Aspiring Emerging Market: Fiscal SNAFU, Political FUBAR 4-6-26

Market Lookback: Confusion Reigns, Dislocation Pours 3-22-26

Market Lookback: The Gulf of Cause and Effect 3-15-26

JOLTS March 2026: Openings Down, Hires Up, Layoffs/Discharges Up 5-5-26

CPI April 2026: 4.1% All Items Less Shelter, 30Y UST 5%

Glenn Reynolds, CFA — Tue, 12 May 2026 17:12:58 GMT

We are still a long way from the Weimer or the 15% handle 10Y and 30Y UST of 1981.

· Headline CPI at 3.8% and Core CPI at 2.8% remain well below 2022 but will complicate Warsh’s sales pitch to the FOMC. Warsh probably cannot “trim those means” in PCE fast enough to help his case to ease. In the meantime, energy costs will be flowing into operating costs and raw materials while eating into discretionary consumer household cash flow and confidence.

The rise in the “All item less shelter” CPI to 4.1% vs. 1.9% in Dec 2024 (Biden’s last month) is an eye opener with Services CPI still sticky and Energy CPI lines spiking. We see more upward pressure on “Food at home” as YoY levels rose MoM by more than a point to 2.9%.
Even if the 17.9% CPI for Energy total and 28.4% for gasoline steals the headlines, that stubborn and steady electricity inflation at 6.1% is one that is going to be hard to shake and is not directly tied to the Strait of Hormuz (even if Hormuz seems to tie into almost everything these days).
There is always a desire to want to dramatize higher interest rates and inflation despite the fact that 2022 did not even bring a recession under Biden and the UST curve we see today is dwarfed by the early 1980s. That does not change the fact that both are bad news right now, and the impact on the consumer and economics of valuing projects could also flow into the valuation of growth equities.
One angle for the half-full crowd is that pricing power can be good for equities even if bad for bonds as long as there is confidence that US-Iran and the strait will get resolved sooner rather than later. Trump stating that he did not even read the whole Iran proposal fails to inspire confidence even if it reminds us why he closely protects his education transcripts (reading helps).
The Iran-US gap on terms and current vacuum leaves a lot of room for dire scenarios if the Strait stays closed into the early summer and peak driving season kicks into gear. There is also the risk of Congressional action to curb exports of refined products to relieve the US consumer, which in turn would be a disaster for some trading partners.

The above chart plots the historical time series for fed funds vs. headline CPI, and the headline CPI just moved higher. We also include the long-term medians, which underscores that this is “not normal.” You can tell the consumer that “core is all that matters” but just don’t do it while he is filling up his gas tank on the way to the grocery store.

“Core” (or PCE more than CPI) may be more significant to the debate around inflation (as defined by economists and monetary junkies), but the purchasing power and the relative affordability of the household basket is about real wages and what in that basket may have to change.

The above time series for headline CPI vs. Core highlights the divergence of the two in this market backdrop. We see some of the highs and lows of the post-COVID timeline with 2.4% Sept 2024 headline level that should call for treating Powell with a little more respect rather than giving him (and the collective FOMC) the electric chair (which now costs much more to operate).

The above table updates some of our favorite special aggregate CPI indexes. While we see some good news from durables this month, the nondurables line is closer to 7% than 6%. Services remain sticky in the 3% range but are now trending higher again after a period of moving lower.

The above table details our Big 5 subsectors for CPI. These roll up to around 75% of the CPI index, so overall this mix is the main event. We will not replay our reluctance to embrace some of the lines that are derived and not consistent with the household checkbook experience” (notably shelter and the deflationary health insurance) but the lines speak for themselves.

The energy and food buckets are the clear adverse moves and the higher costs of housing (when including financing and the monthly payment pain). With many households crushed by health care premiums (notably ACA), they are not “feeling the deflation” in health insurance seen in the chart. Those that struggle with coverage then get held hostage to the rising costs of services as broken out. The 5.5% for “hospital and related services” is not rising but it is high.

The above table breaks out some product lines near and dear to households. We see 4 of 6 higher in April and 2 flat to March. Recreation Services have moderated from the higher levels seen over the recent cycle. That is “good news, bad news” since it might also imply a softening of the consumer sector. Driving or flying to the destination certainly costs more now. Apparel might get some more relief from the arbitrary tariffs slapped on low cost “labor arb” countries that dominate apparel.

Employment Situation: April 2026 5-8-26

New Home Sales March 2026: Favorable Volume, Weaker Prices 5-5-26

PCE Inflation, Income & Outlays March 2026: Inflation Anxiety Level? 5-3-26

1Q26 GDP Advance Estimate: Consumer Fade, Investment Boom 4-30-26

Synchrony Financial: Favorable Consumer Credit Signals 4-24-26

Industrial Production March 2026: Mixed Picture, Big Questions Ahead 4-16-26

Existing Home Sales March 2026: New Beginnings or New Ends? 4-15-26

Producer Price Index March 2026: Heater or Curve Ball? 4-14-26

4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26

The US as an Aspiring Emerging Market: Fiscal SNAFU, Political FUBAR 4-6-26

Market Lookback: Confusion Reigns, Dislocation Pours 3-22-26

Market Lookback: The Gulf of Cause and Effect 3-15-26

The US as an Aspiring Emerging Market: Fiscal SNAFU, Political FUBAR 4-6-26

PCE Inflation, Income & Outlays March 2026: Inflation Anxiety Level?

Glenn Reynolds, CFA — Sun, 03 May 2026 19:37:42 GMT

The month of April printed equity returns not seen for a single month since 2020, but the inflation creep and lack of clear timelines for the Strait of Hormuz and energy cost relief is building the case for even more macro trouble. This coming week brings payroll numbers with CPI and PPI the following week. The reaction of the EU to auto tariff escalation by Trump raise trade risks and the same applies to USMCA talks ahead.
We update our Personal Income and Outlays chart set below. The inflation histories highlight how price pressure looms higher than any period since 2022-2023 and the Dec 2024 2.9% CPI. PCE and CPI are now both back above long-term medians. The spring 2022 oil price spike fueled by the Russian invasion of Ukraine still does not get raised as a contributor to the 2022 inflation experience by Team Trump. That might raise questions of cause and effect that apply in coming months.
The real fed funds level (using whatever inflation you want to net against fed funds) is heading in the direction of Trump’s wish list of negative real fed funds. That would comprise closet stimulus after a 1Q26 where 4% handle PCE inflation lines arrived with the month of March PCE inflation in the 3% handle zone (see 1Q26 GDP Advance Estimate: Consumer Fade, Investment Boom 4-30-26).
Equity markets have continued to rock in April despite inflation and Iran. We looked at asset returns for the month of April in separate LinkedIn posts. We will update the full asset return charts later.
The policy level chaos is only getting worse on the geopolitical front and domestic DOJ insanity. While it has taken Epstein out of the headlines and handed a set of ugly inflation metrics a back seat for now in equity markets and credit risk pricing, the lack of a clear action plan just keeps the global supplier chain fuse burning (see The US as an Aspiring Emerging Market: Fiscal SNAFU, Political FUBAR 4-6-26).

The arrival of Warsh this month will make for some interesting balancing acts between monetary policy and inflation metrics. We can understand why he would rather not do press conferences (avoid direct questions) and also wants to change the data reporting strategy. The PCE metrics just came out with the GDP report for 1Q26 and for the month of March this past week. Those releases and data are making for challenging math for real fed funds.

The above chart frames the timeline for “effective fed funds minus Core PCE.” For this latest date posted, we are down to +0.4%. The level is well below the long-term median of 1.4%.If one sees inflation moving higher and demands from the White House to take rates lower, the economics class students could start wondering why they bother studying.

The above chart updates the long-term time series from 1972 for PCE vs. Core PCE across the decades and cycles. We see the 2.6% headline PCE long-term median in the lower left (below the current 3.5%) and the 2.6% Core PCE median (vs. current 3.2%). That 3.5% headline PCE for March is dramatically better than where we came from in July 2022 at 7.1% PCE, but it is still well above the 2.0% target and going in the wrong direction.

We include the 1997-2026 timeline above for a useful frame of reference on the PCE target of 2.0% that is routinely discussed by the Fed and in the markets. The shorter timeline from 1997 offers a better visual scale separate from the wild 1970s and 1980s.

The above chart frames the long-term differential history between PCE and Core PCE since 1972. The long-term median differential is zero and we are currently at +0.3%. The volatility around that compressed long-term median ties into the energy wildcard with some food distortions also back in the 1970s.

We look at some of the CPI energy and food inflation moves in separate commentaries (see Inflation: The Grocery Price Thing vs. Energy 12-16-24, Inflation Timelines: Cyclical Histories, Key CPI Buckets11-20-23). Food and electricity inflation have been near the top of the affordability political rage-fest. Oil has joined in at this point, but there seems to be little interest from team Trump to argue that the 2022 inflation spike was heavily influenced by the Russian invasion of Ukraine. That evasion of the oil impact in 2022 crushes the credibility of the talking heads in the White House (Hassett, Bessent et al.).

“Higher or lower or stable?” is a good place to start regardless. Any investor should be aware if the line item trends by product groupings, and relative weights are also useful to help guide the strategic reaction headline and core inflation metrics.

Food and Energy is crucial for the consumer even if the monetary ideologues will carry on their views around inflation as narrowly defined in academic terms. The household experience with prices underscore that consumers care about household discretionary cash flow and how their take-home pay frames up vs. their household basket. Derived metrics that do not match up their own checkbook experience (owners’ equivalent rent, health insurance CPI, etc.) matter less to many as their premiums go up and financing costs are higher for their major big-ticket purchases (e.g. autos).

The above chart is something we frequently include in updates as a reminder that political theme-spinning out of Washington on economic cycles and inflation are usually stacked with selective memories, false statements (self-serving lies), material omissions, and conceptually anorexic story telling (like “seller pays the tariffs”)

When PCE growth exceeds DPI growth, as we see again in March 2026, one conclusion is that many consumers are feeling good (i.e., ignore the sentiment metrics). Or perhaps they are tapping credit cards by necessity (e.g. the PCE could include outsized health care premiums put on their credit cards?).

The stimulus overload of 2021…

Oil was a problem after the Putin invasion of Ukraine in late Feb 2022, and inflation hit a high in June 2022 at +9.1% for CPI as a headline grabber (headline PCE at +7.1% in June 2022) before the steady inflation slide to under 3% by the end of 2024. Core PCE had dueling peaks at +5.6% for Feb 2022 and Sept 2022. Try to get Team Trump to even mention the oil price spike in 2022 as a factor in the 2022 CPI numbers. The questioning on the topic by mainstream media is also lame. The CNBC team does not push such Q&A since they are looking to take GOP interview share away from Bartiromo. They need to GOP to keep coming back. Tough questions don’t help that priority.

The COVID relief binge…

COVID was a distinct period for supply chains and supply-demand imbalances. With tariffs and potential trade wars, it will remain important to look for similar imbalances whether in narrow product categories or in broad commodities and materials areas. We clearly face some now in oil and gas, refined products, fertilizers, aluminum, and numerous other inputs generating headlines (helium, sulfuric acid). Some shortages also undermine military readiness.

The above chart covers the time horizon for DPI vs. PCE from early 2022 as the tightening cycle kicked into gear after March 2022. Life in Jan 2022 was still quiet for Disposable Personal Income. We like to include this chart and the prior chart just given the heavy mix of disinformation and politically axed story lines we constantly hear from Trump on Biden being the cause of all the macro problems even at the end of 2025 and into 2026.

The above table plots the monthly Disposable Personal Income MoM change numbers vs. the Personal Consumption Expenditure MoM numbers across the years from 2020 through March 2026 (we dropped 2019 from the chart given chart crowding). It is an easy scan across key time periods for a look at turning points in DPI (e.g. stimulus payments) or PCE.

It is always worth remembering that a tariff is a regressive tax that hits lower income consumers harder and the same for small businesses. The same is true in Medicaid costs based on the income brackets of Medicaid users. A loss of health care benefits and higher pharma costs is a zero-sum game with other consumption lines. The current ACA premium spikes will also be a zero sum “game” for many budgets.

The above chart updates the running savings rate reconciliation that comes with the Personal Income and Outlays each month. We see a fresh low in March 2026 of 3.6% or well below the April 2025 high of 5.5%.

The “Why?” of declining savings rates can be like a political Rorschach test on “buying on happiness” or “getting slammed on prices of the household basket, tariffs and financing costs.” The saving rate dipped below the 4% line in Dec 2025 and posted 3% handles in 3 of the past 4 months. That savings rate decline can be a function of various forces, but the inflation trends are eating more into wages.

Market Commentary: Asset Returns 4-26-26

Synchrony Financial: Favorable Consumer Credit Signals 4-24-26

Industrial Production March 2026: Mixed Picture, Big Questions Ahead 4-16-26

Existing Home Sales March 2026: New Beginnings or New Ends? 4-15-26

Producer Price Index March 2026: Heater or Curve Ball? 4-14-26

CPI March 2026: The CPI Cycle Could Prove Maddening 4-12-26

4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26

Employment Situation March 2026 4-4-26

Payroll Focus: ADP Highlights March 2026 4-1-26

JOLTS Feb 2026: Openings Down, Hires Down, Layoffs Up 3-31-26

Market Lookback: Confusion Reigns, Dislocation Pours 3-22-26

New Homes Sales Jan 2026: The Nays Carry 3-19-26

Market Lookback: The Gulf of Cause and Effect 3-15-26

Housing Starts Jan 2026: Total Starts Up, Completions Up, Permits Down 3-12-26

The US as an Aspiring Emerging Market: Fiscal SNAFU, Political FUBAR 4-6-26

Producer Price Index March 2026: Heater or Curve Ball?

Glenn Reynolds, CFA — Tue, 14 Apr 2026 19:24:45 GMT

Wild Thing, I think you move me, but I wanna know for sure!

The PPI index showed material increases with Goods and Energy driving the move but with Services muted. The YoY move of +4.0% for headline final demand was up notably from 3.4% in Feb 2026. We see “PPI final demand goods” at +4.9% in March, up from +2.5% YoY in Feb, so there is plenty going on under the final demand stats.
Calling anything a leading indicator these days is tricky with so much event risk and behavioral uncertainty, but the PPI reflects negative trends on the energy and goods side and measure increases in services.
The “Final demand energy” line hit 11.2% in March, up from -0.7% in Feb as a sequential MoM move in March of +8.5% rang the bell. There are numerous energy lines detailed in the report, and the pressure from the Iran War is no surprise, Energy related effects without question an unpredictable broad bucket on the question of “How bad can it get and for how long?”
The headline PPI MoM level of +0.5% drops to +0.1% ex-Food and Energy. That cannot ignore the reality of the all-time low of consumer sentiment that is very much influenced by food and energy.

The PPI Final Demand time series is broken out above. The trend shows the sustained rise continuing this month as goods and energy line items keeps the pressure on. We see the low of +0.3% in mid-2023 after the supply and demand crash of April 2020 at -1.5%.

Negative PPI at the COVID peak later saw a demand rebound drive a massive PPI response on the supply-demand imbalances teamed up with extensive relief and stimulus programs with ZIRP added on top of that. The impact of the Russian invasion of Ukraine driving energy higher from the COVID crash seldom gets mentioned by Team Trump (too busy blaming Trump and Powell and they do not want to upset Putin).

That +11.2% in March 2022 came with the start of the tightening cycle as PPI went on its journey to 3.3% by the end of Dec 2024. The current 4.0% in March 2026 is above the 3.3% PPI posted in Dec 2024 (Biden’s last full month in office).

The above table includes a subset of the recent trends on the main PPI lines we choose to focus on for signals. There is certainly no shortage of lines in the PPI release (numerous pages and many lines across Table 1 and Table 2) under various final demand and intermediate goods and services categories for YoY and MoM moves. We covered some of the main groups in the chart, but a scan of the columns in the release looking for outliers is always a good drill. We include some categories that carry lower weightings that are of interest in terms of what they reflect.

PPI data always has a lot to review across the “cost ingredients” as leading indicators to how goods producers might need to consider pricing actions or might experience margin compression. Print out table 1 and Table 2 and ponder the 12-month YoY columns. The very wide range is easy to see.

Energy, materials, and goods are showing the cost pressures…

Energy setbacks are no surprise with gasoline posting a 15.7% MoM and +14.0% YoY. Gasoline was posting deflation as recently as Dec and Jan. Diesel is +42% MoM and +51% YoY, so that is going to be flowing into freight and logistics costs including surcharges. On the intermediate side of the chart collection, we see jet fuel at +42.2% YoY and +30.7% MoM. The disruptions of flights and pressure on airline fares has generated more than its share of headlines.

Food costs were very muted this month, and we have a hard time seeing how that does not change on the combination of energy costs and the pressure on fertilizer that has been in the headlines. Among notable food lines was “Fresh and dry vegetables” at +49% YoY (but -10.7% MoM in March) and +20.2% YoY for coffee (-1.6% March). Beef and veal at +19.7% YoY was down to +2.2% MoM.

“Final demand for Nonferrous metals” was +36.7% YoY for a wide range of reasons as discussed in other commentaries along the way. Unprocessed nonferrous metal ores are +75% YoY. Primary nonferrous metals are +67% YoY.

We see the final demand goods line showing the impact of tariffs and other cost pressures with “final demand goods” at +4.9% YoY and a 29.1% weighting. The Feb to March move of +1.6% come after +1.0% MoM for Jan to Feb after being slightly negative in Dec and Jan. We also see the sustained pressure in intermediate demand for “processed goods” in Feb and March at 6.6% YoY.

Services have been kind…

The “final demand services” line at a 68.3% weighting posted 3.7% YoY. That was not as bad as the goods since and that services line comprises a much bigger slice of what is a services economy in the US. Services even ticked down to 0.0% in March vs. positive increases in earlier months and notably MoM in Dec and Jan. If we drop down into “services for intermediate demand” we see only +2.9% YoY with Transportation and Warehousing a notable pressure point with a number of lines in the 7% handle area.

In the end, the PPI was an unfavorable number with a lot of action ahead subject to Iran outcomes and Goods pricing decisions with tariffs still very much a reality.

CPI March 2026: The CPI Cycle Could Prove Maddening 4-12-26

4Q25 GDP: More Adverse Revisions in the Golden Year 4-9-26

Employment Situation March 2026 4-4-26

Payroll Focus: ADP Highlights March 2026 4-1-26

JOLTS Feb 2026: Openings Down, Hires Down, Layoffs Up 3-31-26

Market Commentary: Asset Returns 3-30-26

Market Commentary: Asset Returns 3-23-26

Market Lookback: Confusion Reigns, Dislocation Pours 3-22-26

New Homes Sales Jan 2026: The Nays Carry 3-19-26

Producer Price Index Feb 2026: Getting Warmer 3-18-26

Industrial Production Feb 2026: Capacity Utilization 3-16-26

Market Lookback: The Gulf of Cause and Effect 3-15-26

Housing Starts Jan 2026: Total Starts Up, Completions Up, Permits Down 3-12-26

The US as an Aspiring Emerging Market: Fiscal SNAFU, Political FUBAR 4-6-26

CPI March 2026: The CPI Cycle Could Prove Maddening

Glenn Reynolds, CFA — Sat, 11 Apr 2026 14:06:27 GMT

The fate of the energy sector and flow-through impacts across a wide range of markets are still a moving target. Meanwhile, uncertain goods pricing strategies in 2026 to deal with tariffs also keep the range of CPI scenarios a major challenge for budgeting decisions and economists finding confidence in the underlying variables. The CPI whipsaw in energy and the clear threat to food inflation from rising costs of fertilizer, oil, labor shortages and freight and logistics does not leave room for complacency even if the market yawned at the March 2026 CPI release.
Our favorite special aggregate CPI index is “All items less shelter” (Table 3 of the release) and it has now moved from reassuring to uncomfortably high at +3.4% YoY in March 2026. As we detail below, that 3.4% for CPI ex-Shelter is up by over a point this month from 2.1% in Feb. Within that special CPI aggregate index bucket, we see “All items less food and shelter” at 3.6% and “All items less medical care” at 3.3%. That is not a pretty picture even if subject to where the Iran war crisis evolves.
Our favorite example of a useless BLS CPI metric is now “health insurance” (0.9% weighting in CPI index). Headlines and the “real world” household experience of insurance premium spikes and a sharp erosion of coverage economics has somehow translated into YoY health insurance deflation of -5.3%. Meanwhile, the MoM CPI metric posted health care MoM deflation in Jan, Feb, and March 2026. That is a neat trick and might come as a surprise to those paying health insurance premiums. The 6.4% CPI YoY for “Hospital and related services” is not helping the medical services story line with “Home health care” at +7.6% and with “Nursing homes and adult day services” at 5.2%. That is tough CPI given current demographics.
Energy (6.4% weighting in the CPI index) spiked to +12.5% and naturally captured the headlines in March CPI with Energy Commodities at +19.4% (including Gasoline at 18.9% and 2.9% of the CPI index). Electricity inflation remains a problem separate from the latest Iran issues at 4.6%YoY CPI (2.5% of CPI index) and Utility Piped Gas at +6.4% (0.8% of CPI index). The commodities piece of CPI is tied into global trends from upstream oil and gas to refined products (including diesel, jet fuel, and marine fuel). The market is one sudden escalation away from supply and cost issues worsening (e.g., Houthis and the Red Sea).

The above chart plots the time series for headline and core CPI since Jan 2020 just ahead of COVID. We also detail the long-term medians for each from Jan 1973 with a 3.0% median for headline CPI and 2.9% for core.

Headline CPI of 3.3% is where the market was hovering back in Jan 2025, so we should not be seeing victory laps from the White House on CPI metrics. The Core CPI of 2.6% is above the Sept 2024 lows of +2.4% and also is not “end zone dance” material for Team Trump.

The 2.6% core number is clearly a respectable number in historical context and below the long- term median. That said, it is not a reassuring backdrop with Iran and tariffs still a major risk factor in how goods and services could get priced in 2026. The market also still faces uncertainty around the USMCA review, NATO withdrawal threats, and how that all plays into trade responses.

While economists typically prefer the “core CPI” metric, I remember putting gas in the car next to the supermarket after the Arab Oil Embargo (started Oct 1973 as part of an Israeli war response) was showing its stagflation effects. Headline CPI seemed more important to household purchasing power and household discretionary cash flow. Monetary theories were not the topic du jour in Brockton MA that year (notably in a town dominated by home heating oil at the time).

As we look back at the adventure across the inflation spike of 2022, the damage was mitigated by a well-managed set of Fed actions across 2022 and 2023 that took headline CPI down from 9.1% in June 2022 to 2.9% in Dec 2024. Trump speaks of his 2025-2026 performance as if he started in June 2022 when CPI was 9.1%. Headline CPI is 0.4 points higher now at 3.3%.

Our oft-stated objection to the cause-and-effect rhetoric is that Trump never mentions the role of Russia invading Ukraine in Feb 2022 or how that slammed global oil and LNG and fueled inflation in the US. In fact, Putin gets a red carpet and even gets to cash in on the current crisis in Iran. No blame there from Trump for any US inflation.

The above time series offers a reminder of the multiple inflationary market imbalances across the decades. We plot CPI vs. fed funds to give a sense of Fed policy and real fed funds rate. The combination of inflationary pressures and FOMC question marks could leave the market with negative real fed funds in 2026. If Trump gets his way on lower fed funds, that potential only rises.

As we go to print, the FedWatch “Vegas line” showed a 83.4% chance of no change by the Oct FOMC meeting. The chance of 1 hike by then is just below 2% with the odds of 1 cut by then at 13.9%. As we covered in earlier commentaries, those odds have been whipping around since the start of the Iran War (see Market Commentary: Asset Returns 3-30-26).

The CPI spike in the aftermath of the COVID supply crisis came on the other side of excessive stimulus action that turbocharged demand, in turn bringing major supply-demand imbalances in the goods markets. That inflation effect had ZIRP tailwinds with the invasion of Ukraine by Russia in late Feb 2022 serving as a critical inflationary factor that seldom gets mentioned in the partisan attacks.

The chart offers a look at the first major inflation spike since 1979, which brought Volcker into the job by August that year. The 1979 energy volatility is often framed as the “Iranian oil crisis” (sound familiar?). That earlier 1979 inflation spike rolled into the mother of all tightening cycles from Volcker (including some 20% fed funds days not evident in the weekly average data of that period). That chaos brought a double dip stagflation cycle across 1980-1982 that crushed many bellwether companies.

This current Iranian crisis is much more serious and damaging than the 1979 experience since the US is the #1 oil and gas producer in the world and a major exporter of oil and gas liquids and also includes downstream refined products. The unfolding downstream product supply crisis is doing serious damage from Europe to Asia with jet fuel supply leading the headlines this past week.

The US also neighbors to one of the largest bases of reserves with Canada, who is a major supplier with room for impressive growth if the Canadian policy makers can get out of their own way. Trump has given them plenty of reasons to build their global export capacity and be less dependent on US end markets. Canada is by far the largest oil importer into the US, which in turn frees up more US supply of oil, refined products, and LNG to export.

The above table details a subset of the special aggregate CPI indexes we watch. “All items less shelter” is flashing some warning signs with a significant move higher for YoY metrics during March 2026. Services CPI remains above the 3.0% line as does “Services less energy services” at 3.0%.

We see Durables MoM CPI remaining in check over the past two months as the market tries to handicap where the tariff actions will start to play a role. Nondurables CPI rose to almost 5% in March at 4.9%. “Nondurables less Food” (not shown) hit 7.4% YoY in March.

The above table details our Big 5 subsectors for CPI. These roll up to around 75% of the CPI index, so overall this mix is the main event. We already addressed energy and health insurance above. Energy has a very wide range of potential outcomes subject to the rather bizarre twists and turns of a “game theory” with no rules and too much “humanity” in the picture. The toxic mix includes high geopolitical economic stakes, massive egos, religious zeal, and an uncomfortably high mix of cultural ignorance, incompetence and rampant dishonesty.

Medical care services at 3.7% YoY includes “hospital and related services” and moved lower from 4.1% in Feb 2026. With health insurance premiums soaring (despite the BLS measurement), the -5.3% health insurance CPI number seems less than credible. The BLS needs to rework its methodology to better reflect reality. To the extent households drop off health insurance on affordability (notably in the ACA), they then must face that 6.4% CPI threat from “Hospital and related services.” That is down from 7.6% in Feb 2026.

We put together a version of Automotive that is around 11% of the CPI index if we exclude gasoline, which we include in energy (see Automotive Inflation: More than Meets the Eye10-17-22). The discipline shown by OEMs in new vehicle pricing could be coming to an end in 2026 with small increases going a long way on big ticket items and funding costs seeing little relief so far. The CPI cost of a vehicle does not include financing costs, so it comes with an “asterisk” on affordability.

The table above tells the story with “Food-all” at 2.7% (down from 3.1% in Feb 2026). If we use “Food at home,” the 1.9% in March is better than the 2.4% in Feb 2026. In other words, food inflation in general has improved sequentially but there is a lot of noise ahead with labor costs, fertilizer pressures, the cost of simply operating equipment before considering freight and logistics add-ons that flow into the consumer cost.

Both “Food at Home” and “Food Away from Home” are higher in March 2026 than in Dec 2024 (Biden’s last full month). The CPI levels by product line vary widely. Meat CPI at 6.8% YoY was down sequentially from Feb 2026 (Beef and Veal at 12.1%) with Lettuce at 13.8%, Tomatoes at 22.6%, Coffee at 18.7%, and Sweets at 8.1% on the list of gripes for many, including me (I cannot live without lettuce. Sarcasm alert).

The above table highlights a few categories near and dear to many households. Recreation services declined and are well below the 2022 to 2025 levels seen with the post-COVID boom in consumer spending.

We see the lofty tariffs on the “labor arb” countries (notably in Asia) starting to show up in the Apparel line. While 3.4% CPI on Apparel is not back at 2022 levels, there is room for trouble there. February and March were going the wrong way quickly in MoM metrics.

Next comes the simple cost of freight and logistics that will add to the cost recovery challenge. Diesel is up sharply, and that will weigh heavily on delivery costs and related surcharges for all goods and that includes apparel. That will show up in new inventory and cost of sales even as pricing decisions to mitigate tariffs see more visibility (note: buyer writes the check for tariffs, no matter what Trump says). The tariff and freight knock-on unit cost effects will lead to pass-through pricing decisions or worse margins. Choices need to be made.

Material costs in clothing also include a heavy mix of downstream hydrocarbon derivatives that feed clothing prices. While it may not match the market share of the polyester disco shirts (1970s), synthetic clothing costs can impact profit margins and pricing strategies in manufacturing.

Airline fares are tied to jet fuel prices, so that air fare CPI of 14.9% is up from 7.1% in Feb 2026 and 2.2% in January. Jet fuel as a refined product is high on price and short on supply globally. How that flows into vacation plans and business travel is a factor to watch. Summer is the peak travel season.

Employment Situation March 2026 4-4-26

Payroll Focus: ADP Highlights March 2026 4-1-26

JOLTS Feb 2026: Openings Down, Hires Down, Layoffs Up 3-31-26

Market Commentary: Asset Returns 3-30-26

Market Commentary: Asset Returns 3-23-26

Market Lookback: Confusion Reigns, Dislocation Pours 3-22-26

New Homes Sales Jan 2026: The Nays Carry 3-19-26

Producer Price Index Feb 2026: Getting Warmer 3-18-26

Industrial Production Feb 2026: Capacity Utilization 3-16-26

Market Lookback: The Gulf of Cause and Effect 3-15-26

PCE Inflation Jan 2026: Personal Income & Outlays 3-13-26

Housing Starts Jan 2026: Total Starts Up, Completions Up, Permits Down 3-12-26

PCE Inflation Jan 2026: Personal Income & Outlays

Glenn Reynolds, CFA — Fri, 13 Mar 2026 20:13:03 GMT

Paying more is patriotic!

The review of January data loses some of its value given what is unfolding in March in the Iran War, but PCE inflation was “going nowhere fast” in January with headline PCE ticking slightly lower to 2.8% and Core PCE inflation higher to 3.1% and both still well above target.
PCE was supported by -0.8% in Energy Goods and Services with Food steady at +2.0%. Energy will certainly be moving higher while spiraling costs along the food supplier chain to the kitchen table will also push Food prices higher on a combined range of factors. Freight and logistics costs will be a critical driver even before all the moving parts of fertilizer costs and related supply-demand imbalances.
During 2025, constructive notes in the data mix had been that consumers were generally spending faster than their income was growing (PCE growth > DPI growth). PCE growth is the main supporter of economic expansion, so that helped the macro story. That relationship just shifted to DPI being ahead of PCE this month for the monthly growth trends. We have a chart near the end of this comment on that history. Jan 2026 saw saving rates rise. The challenge to the consumer from here includes the zero-sum impacts from the Iran War even as health care budgets also trend higher on health insurance premiums.
The FedWatch odds of no FOMC action have been rising with June odds at 75% for “no action” and even September sees odds at 54% for no easing. Late October is on the cusp of a move at 49.4%. That was not the Trump playbook to start the year.

The above chart updates the time series for “fed funds minus core PCE.” The PCE inflation metric tends to be a focal point for the FOMC and economists, but the pressure on energy costs (notably electricity and utility piped gas) and food inflation had already been attracting household budget focus and influencing consumer moods in a midterm election year.

At last look, the national retail regular gasoline cost today from AAA was $3.63, or up by over 23% over 1 month. Diesel was $4.89 or up by 34%, and that translates into higher delivery costs, surcharges and inflation – or lower profits for those goods and services providers paying those delivery costs.

The long-term median on the FFER vs. PCE differential is 1.4%, but that has been cut almost in half. In a range of comments, Trump had been demanding an immediate move to negative real fed funds rates by the Fed. He might go radio silent on that topic for a while (is that even possible?) until Warsh is in the seat and the Iran effects sorted out.

Today’s PCE release would not have helped with headline PCE price inflation at 2.8% and Core PCE at 3.1% YoY. The UST curve is not showing confidence right now with the 10Y UST at 4.28% and 2Y UST at 3.73%.

The Jan 2026 PCE numbers are at reasonable levels in long-term context, but they are in somewhat of a stall with numerous key lines going in the wrong direction. Even if one seeks to embrace the “one-time event” theme for tariffs, that still means higher price levels that can bring reduced purchasing power for select line items – subject to a household’s typical “basket” (coffee drinkers, beef eaters and “sweets” fans take note). The Iran effects now open up even more stagflation scenarios.

Debate in financial and economic circles rage on around whether the Fed inflation target should be 2.5% or 3.0% or some other number. The above chart offers a reminder of how hard it is to get to 2.0% or below for headline PCE or core PCE. The earlier chart from 1972 covers the timeline from the inflationary/stagflationary periods of 1973 to 1982 to hammer that home.

The “1997 to 2026” period presents a rare stretch at or below the 2.0% PCE line and core PCE median as noted in the chart. It took a lot to go wrong in that time horizon to cross that 2.0% threshold. The events along the way included tech bubbles bursting in 2000-2001, oil crashes in the late 1990s and in the late 2014 to early 2016 period, and a bank system crisis from 2008 to 2011 (including sovereign stress) to get us there. The COVID pandemic in 2020 was a new one for the modern capital markets.

In the above timeline, we even see deflation in the post-crisis recession trough in mid-2009. The collapse in oil prices in late 2015 and then the COVID impact in 2020 gave an assist to low PCE before the supply-demand boomerang hit in 2021. Oil is a big headline mover whenever there is a sharp decline or spike, and we have had plenty of both.

This current situation rivals the geopolitical risk of late 1973 into early 1975. The biggest difference of course is that the US is now the largest oil and gas and liquids producer in the world. On the other hand, those US and Canadian producers will be raising prices along with the rest of the world.

It is interesting that the topic of the Feb 2022 invasion of Ukraine and ensuing oil and gas spike never seems to find a way into the Trump and MAGA rhetoric on inflation in 2022. That was a major factor in inflation, but the economic reality of the Russia relationship did not serve the domestic political priorities of Team Trump in assigning any blame there for inflation.

The lack of justice in this Middle East crisis is that the US is unleashing Russia to produce and profit by waiving sanction limits. They say “temporary” but that faces some skepticism with pro-Russia Witkoff and Jared on the job as NY real estate guys (not geopolitical experts with a pro-Democracy set of guidelines). The fact that Putin was a major factor in the 2022 inflation and now gets to profit from this round of oil inflation goes into the “life is not fair” category.

Gasoline has been in deflation mode for most of 2025, and that helped dampen the inflation headline numbers. As 2025 wore on, energy inflation has gone the other way and notably in areas such as electricity and piped utility gas (see CPI Jan 2026: Reassuring Numbers, Missing Pieces 2-13-26, Simplifying the Affordability Question 11-11-25, Retail Gasoline Prices: Biblical Power to Control Global Commodities 11-13-25). Now oil and LNG will pile on globally.

The above chart frames the long-term differential history between PCE and core PCE since 1972. The long-term median differential is zero and we are currently at -0.3%. The volatility around that compressed long-term median ties into the energy wildcard with some food distortions also back in the 1970s. We look at some of the CPI energy and food inflation moves in separate commentaries (see Inflation: The Grocery Price Thing vs. Energy 12-16-24, Inflation Timelines: Cyclical Histories, Key CPI Buckets11-20-23). Food and electricity inflation have been near the top of the affordability political rage-fest. Now oil will join in.

When PCE growth exceeds DPI growth, the conclusion is that the consumer is feeling good or perhaps tapping credit cards by necessity (e.g. the PCE could include outsized health care premiums).

The stimulus overload of 2021…

The COVID relief binge…

COVID was a distinct period for supply chains and supply-demand imbalances. With tariffs and potential trade wars, it will remain important to look for similar imbalances whether in narrow product categories or in broad commodities and materials areas. So far, the major trade partners have not initiated much in retaliation with the exception of a brief China spat. That has mitigated the damage, but that de facto submission could come back to haunt some major trade partners if others run for office with a “get tough” election pitch. Caving in to Trump on tariffs is getting less popular in the EU and Canada.

Jacking up aluminum, steel, and copper on the materials side and seeking even more tariffs on lumber was not and is not a great idea for keeping prices and costs contained. Auto tariffs under Section 232 are extreme even after the array of “deals” and could go higher if the USMCA breaks down in 2026. We saw semis, pharma, and aircraft/engines/parts added to the Section 232 pipeline although most of the aircraft/parts risk was mitigated in EU talks. Other actions brought in commercial vehicles, branded pharma, cabinets, and a range of targets on national security grounds including upholstered furniture.

The above chart covers the time horizon for DPI vs. PCE from early 2022 as the tightening cycle kicked into gear after March 2022. Life in Jan 2022 was still quiet for Disposable Personal Income. We like to include this and the prior chart just given the heavy mix of disinformation and politically axed story lines we constantly hear from Trump on Biden being the cause of all the macro problems at the end of 2025.

The above table plots the monthly Disposable Personal Income MoM change numbers vs. the Personal Consumption Expenditure MoM numbers across the years from 2020 through Jan 2026 (we dropped 2019 from the chart this month given chart crowding). It is an easy scan across key time periods for a look at turning points in DPI (e.g. stimulus payments) or PCE.

It is always worth remembering that a tariff is a regressive tax that hits lower income consumers harder and the same for small businesses. The same is true in Medicaid costs based on the income brackets of Medicaid users. A loss of health care benefits and higher pharma costs is a zero-sum game with other consumption lines. The current ACA premium spikes will also be a zero sum “game” for many budgets.

The above chart updates the savings rate history with the latest numbers rising to 4.5% from 4.0%. That is a tick below the June highs of 4.6%. The BEA savings rate data comes with the warning label that it has been a case study in revisions, but it does make intuitive sense as a reflection of how confident households are in their spending vs. savings.

We have looked at the savings rate dynamics in earlier commentaries (see Savings Rates: Context Across the Cycles 10-27-23). Savings rates peak in times of worry (occasionally panic) as evident in the chart above. As of 2025, households had clearly been spending even if some might come to regret it when credit card bills come due. As we roll into 2026, we could start to see pressure on the PCE lines.

Looking back across time, we see some examples. The period leading into May 1975 was no picnic after the massive stagflation bout and the same was true in Nov 1981. Dec 1992 had a raft of issues as the commercial real estate bubble was bursting (and hammering some banks), the leveraged finance boom was on the back end of the default cycle, the thrift crisis effects were still playing out across some major regional economies (notably TX and CA), and the regional oil patch pain that had come home to roost in 1987-1990 was lingering.

Housing Starts Jan 2026: Total Starts Up, Completions Up, Permits Down 3-12-26

CPI Feb 2026: It’s Making You Wait… 3-12-26

Market Commentary: Asset Returns 3-8-26

Payrolls Feb 2026: Into the Weeds 3-8-26

Employment Situation Feb 2026: Payrolls Get Ugly 3-8-26

PCE Income & Outlays Dec 2025: Inflation Reversal? 2-20-26

4Q25 GDP (Advance Est.): Less Distortion This Time 2-20-26

Industrial Production Jan 2026: Capacity Utilization Trends 2-19-26

Home Starts Dec 2025: Wrapping a Weak 2025 2-18-26

Market Lookback 2-17-26

2025 Spread Walks and Multicycle Return Histories 1-5-26

Annual Return Differentials: HY vs. IG Across the Cycles 1-3-26

Total Return Quilt Across Asset Classes 2008-2025 1-2-26

Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26

CPI Feb 2026: It’s Making You Wait…

Glenn Reynolds, CFA — Wed, 11 Mar 2026 16:44:42 GMT

“But the CPI release said health care insurance was deflating?!”

Headline and Core CPI remain in check for Feb 2026 even if all eyes during the spring will be locked in on how the energy line and the scary impacts of higher freight and materials costs flow into other CPI lines. That includes food costs. Overall, the CPI mix looked a lot like Jan but is heading for a lot more change (see CPI Jan 2026: Reassuring Numbers, Missing Pieces 2-13-26). We get a PCE inflation update this week with PCE running ahead of CPI at this point (see PCE Income & Outlays Dec 2025: Inflation Reversal? 2-20-26).
Energy will remain the hot topic ahead as the Energy CPI of 0.5% (6.3% of CPI index) includes -5.2% for Energy Commodities (3.0% of CPI) along with Electricity (2.5% of CPI index) at +4.8% CPI and Utility Piped Gas (0.8% of CPI index) at +10.9% CPI. That Energy CPI includes a -5.6% CPI for Gasoline in the commodities bucket. The recent spike in gasoline will drive surcharges and delivery cost inflation in coming weeks and months that will necessarily flow into food, goods, and services as freight and logistics bills rise.
Health insurance inflation is one of those areas that the White House is unlikely to bring up given the trend in premiums experienced by the consumer. That said, right now the CPI line for health insurance shows deflation given the methods used by the BLS for health insurance. It is one of those issues (like Shelter and Owners Equivalent Rent) where the day-to-day realities of “cash-in, cash-out” at the household level don’t align with CPI. The reported Health insurance CPI is most definitely diverging from the household checkbook experience. We see a -3.6% YoY CPI for health insurance as of Feb 2026. Health care insurance has a CPI index weighting of 0.88% but punches above its weight class in importance for many consumers.

The above chart tracks the post-COVID journey of headline CPI and Core CPI since just before COVID and then across the inflationary spike into 2022. We saw the end of ZIRP in March 2022 and then the tightening cycle that saw sharply lower inflation across 2023 and into 2024. We see the 2.4% lows in late 2024 for headline CPI with the end of December 2024 at 2.9% for headline.

Trump always starts his bragging rights by comparing his CPI to June 2022, which is not how reality works. The FOMC did their job quite successfully across 2023 after they whiffed in 2021 by waiting too long. Trump doesn’t get to start his game clock at 9.1% in June 2022, and Trump should probably thank Powell and the FOMC for dealing him good cards.

By the numbers, the current +2.4% headline CPI is back around a recent Sept 2024 low point noted in the chart. The Feb 2026 2.4% headline and 2.5% core remain above target but are in a very good zone based on history. The Iran War and energy fallout is about to upset the applecart in coming weeks. For example, national retail regular gasoline is at $3.58 as we go to print, which is up by +22% over 1 month. Diesel is at $4.83 or up by 32% (Source: AAA). Diesel flows into the transport cost questions.

While Trump has slammed Powell and Biden as the most destructive forces since the Black Plague, the fact is that Biden was only the second President in 50 years to get through his term with no recession months. Clinton was the other recession-free President across two terms but with much better headline and PCE growth years to boast (see Presidential GDP Dance Off: Clinton vs. Trump 7-27-24). Avoiding a recession by late 2022 was a function of strong consumer spending and low unemployment that pushed through the CPI pain.

One could say that Powell led a Fed that tightened and beat inflation with no recession. Volcker had a double dip but also faced a much more dangerous inflation threat. We live in a policy world where the lack of blind obedience makes one the enemy subject to blame and the target of generally concept-lite and fact free attacks. Too often the attacks are economically incoherent. That will only muddy the analysis of the Iran war fallout.

The above time series offers a reminder of the multiple market imbalances across the decades. The CPI spike in the aftermath of the COVID supply crisis teamed up with excessive stimulus action and the invasion of Ukraine by Russia in late Feb 2022. It is not a surprise that you never hear Putin’s role in the inflation spike cited by the White House.

The chart also offers a look at the first major inflation spike since 1979 brought Volcker into the job by August that year. The 1979 energy volatility is often framed as the “Iranian oil crisis” (sound familiar?). This current Iranian crisis is much more serious and damaging than the 1979 experience (unless you were a hostage). That period rolled into the mother of all tightening cycles from Volcker (including some 20% fed funds days) and a double dip stagflation cycle across 1980-1982 that crushed many bellwether companies.

The above table updates the Special Aggregate indexes from Table 3 in the CPI release. Our favorite is “All items less shelter” since we consider Owners’ Equivalent Rent as a fairly useless derived metric that bears little resemblance to the household budget and the “cash in, cash out” checkbook experience. All items less shelter is at 2.1% in Feb 2026, which is down from the mid to late 2025 highs but above the 2023-2024 levels.

We see Services at 3.1% as the line remains stubborn in a services economy with a decent trend in consumer spending. We look for consumer spending metrics in GDP reports and the Personal Income and Outlays releases (we get both of those this week) among other releases (Retail Sales, etc.). Durables CPI levels are in check but above the deflation of 2023-2024. Nondurables also remain low in the sub-2% range.

The above table details our Big 5 subsectors for CPI. These roll up to around 75% of the CPI index, so they are the main event. We already addressed energy and health insurance in the bullets above. Energy is already spiraling and swinging wildly the past week.

Medical care services at 4.1% includes “hospital and related services” at 7.6% with health insurance premiums soaring outside the BLS measurement. To the extent households drop off health insurance on affordability (notably ACA), they then must face that 7.6% CPI threat from hospital and related services.

We have put together a version of Automotive that is around 11% of the CPI index if we exclude gasoline, which we include in energy (see Automotive Inflation: More than Meets the Eye10-17-22). The discipline shown by OEMs in new vehicle pricing could be coming to an end in 2026 with small increases going a long way on big ticket items and funding costs seeing little relief so far.

The table above tells the story with “Food-all” at 3.1% or flat to Dec 2025. If we use “Food at home,” the 2.4% is also flat to Dec 2025. In other words, food inflation in general is not lower and not higher in Feb 2026 vs. Dec 2025. Both “Food at Home” and “Food Away from Home” are higher in Feb 2026 than in Dec 2024 (Biden’s last full month).

The story in the line items varies by product line. Meat CPI at 8.6% (Beef and Veal at 14.4%), Lettuce at 15.3%, Coffee at 18.4%, and Sweets at 9.0% are on the list of gripes for many, including me (I can live without the lettuce).

The above table highlights a few categories near and dear to many households. We see the lofty tariffs on the “labor arb” countries (notably in Asia) starting to show up in the Apparel line. Airline fares are tied to jet fuel prices, so that 7.1% line is just getting warmed up. How that will flow into vacation plans and business travel will be one to watch.

Some CPI Histories:

Inflation: The Grocery Price Thing vs. Energy 12-16-24

Inflation Timelines: Cyclical Histories, Key CPI Buckets11-20-23

Fed Funds – Inflation Differentials: Strange History 7-1-23

Fed Funds, CPI, and the Stairway to Where? 10-20-22

Automotive Inflation: More than Meets the Eye10-17-22

See also:

Market Commentary: Asset Returns 3-8-26

Payrolls Feb 2026: Into the Weeds 3-8-26

Employment Situation Feb 2026: Payrolls Get Ugly 3-8-26

PCE Income & Outlays Dec 2025: Inflation Reversal? 2-20-26

4Q25 GDP (Advance Est.): Less Distortion This Time 2-20-26

Industrial Production Jan 2026: Capacity Utilization Trends 2-19-26

Home Starts Dec 2025: Wrapping a Weak 2025 2-18-26

Market Lookback 2-17-26

CPI Jan 2026: Reassuring Numbers, Missing Pieces 2-13-26

2025 Spread Walks and Multicycle Return Histories 1-5-26

Annual Return Differentials: HY vs. IG Across the Cycles 1-3-26

Total Return Quilt Across Asset Classes 2008-2025 1-2-26

Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26

PCE Income & Outlays Dec 2025: Inflation Reversal?

Glenn Reynolds, CFA — Fri, 20 Feb 2026 19:53:38 GMT

FOMC planning session.

The market had a PCE price index setback to end 2025 just as Fed independence had eased out of the headlines. Warsh will get his test soon enough.
With the headline PCE price index rising to 2.9% from 2.8% and Core PCE prices moving to 3.0% from 2.8%, life is going to get tricky at the Fed unless payroll trends offer more excuses.
Food inflation in PCE ticked higher to 2.1% YoY in Dec 2025 from 2.0% in Nov 2025 while Energy Goods and Services ticked lower to 2.2% in Dec from 4.4% in Nov 2025. That energy number is still well above the recent deflation (including -3.8% in May).
Personal Consumption Expenditure growth ran ahead of Disposable Personal Income Growth, so the consumer remains in the game.
The combination of higher PCE inflation on a mediocre 4Q25 GDP reporting day keeps the market tone mixed with the end of IEEPA raising questions on what comes next (see 4Q25 GDP (Advance Est.): Less Distortion This Time 2-20-26).

The above chart updates the time series for “fed funds minus core PCE.” The PCE inflation metric tends to be a focal point for the FOMC and economists, but the pressure on energy costs (notably electricity and utility piped gas) and food inflation are attracting household finance focus and influencing consumer moods in a midterm election year.

The long-term median on the FFER vs. PCE differential is 1.4%, but recent easing has cut that almost in half. In a range of comments, Trump has demanded an immediate move to negative real fed funds rates by the Fed. That is easier said than done with inflation well above the Fed target and the economy doing better than earlier in 2025. Today’s PCE release will not help with headline PCE price inflation higher at 2.9% in Dec vs. 2.8% in Nov and 2.5% as recently as May. Core PCE rose to 3.0% YoY in Dec from 2.8% in Nov 2025.

The Dec 2025 PCE numbers are at reasonable levels in long-term context, but they are in somewhat of a stall with numerous key lines going in the wrong direction. Even if one seeks to embrace the “one-time event” theme for tariffs, that still means higher price levels that can bring reduced purchasing power for select line items – subject to a household’s typical “basket” (coffee drinkers, beef eaters and “sweets” fans take note).

In the move from early spring to Dec 2025, Goods moved from deflation to +1.7% inflation. We see Energy Goods and Services move from -3.8% deflation in May to +4.4% inflation in Nov 2025 and now down to +2.2% in Dec 2025. Services remain sticky at +3.4% in Dec 2025 down slightly from +3.6% in Aug 2025. When you hear the refrain of “prices are way down” in the White House rambling routines, it is simply not true.

We include the 1997 to 2025 time horizon above for a good frame of reference on the PCE target of 2.0% that is routinely discussed by the Fed and in the markets. The shorter timeline from 1997 offers a better visual scale separate from the wild 1970s and 1980s.

The “1997 to 2025” period presents a rare stretch at or below the 2.0% PCE line and core PCE median as noted in the chart. It took a lot to go wrong in that time horizon to cross that 2.0% threshold. The events along the way included tech bubbles bursting in 2000-2001, oil crashes in the late 1990s and the late 2014 to early 2016 period, and a systemic bank system crisis from 2008 to 2011 (including sovereign stress) to get us there. The COVID pandemic in 2020 was a new one for the modern capital markets.

In the above timeline, we even see deflation in the post-crisis recession trough in mid-2009. The collapse in oil prices in late 2015 and then the COVID impact in 2020 gave an assist to low PCE. Oil is a big headline mover whenever there is a sharp decline or spike, and we have had plenty of both.

The Biden politics and stimulus policies definitely had a major adverse inflationary impact on pricing and supply-demand imbalances after COVID. That is also the case with the Russian invasion of Ukraine.

Gasoline has been in deflation mode for part of 2025, and that helped dampen the inflation headline numbers. As 2025 wore on, energy inflation has gone the other way and notably in areas such as electricity and piped utility gas (see CPI Jan 2026: Reassuring Numbers, Missing Pieces 2-13-26, Simplifying the Affordability Question 11-11-25, Retail Gasoline Prices: Biblical Power to Control Global Commodities 11-13-25).

The above chart frames the long-term differential history between PCE and core PCE since 1972. The long-term median differential is zero and we are currently at -0.1%. The volatility around that compressed long-term median ties into the energy wildcard with some food distortions also back in the 1970s. We look at some of the CPI energy and food inflation moves in separate commentaries (see Inflation: The Grocery Price Thing vs. Energy 12-16-24, Inflation Timelines: Cyclical Histories, Key CPI Buckets11-20-23). Food and electricity inflation have been near the top of the affordability political rage-fest.

The above chart updates the trend line in disposable personal income (DPI) vs. personal consumption expenditures (PCE) that we get with each monthly PCE release. When PCE growth exceeds DPI growth, the conclusion is that the consumer is feeling good or tapping credit cards by necessity (e.g. the PCE could be outsized health care premiums).

The stimulus overload of 2021…

The COVID relief binge…

As a reminder, Trump signed the CARES Act in March 2020 (shows up in the DPI in April 2020) and Trump also signed the Dec 2020 legislation disbursed in Jan 2021 (Trump seldom mentioned that Dec 2020 one since it was easier to blame Biden and Powell). Biden signed the America Rescue Plan (disbursed in March 2021) that was a demand pile-on (we would argue over the-top-stimulus) in a supply-constrained environment (thus inflation). The DPI and PCE wave tied to each of those shows up in the chart above.

COVID was a distinct period for supply chains and supply-demand imbalances. With tariffs and potential trade wars, it will remain important to look for similar imbalances whether in narrow product categories or in broad commodities and materials areas. So far, the major trade partners have not initiated much in retaliation with the exception of a brief China spat. That has mitigated the damage but that de facto submission could come back to haunt some major trade partners if others run for office with a “get tough” election pitch.

Jacking up aluminum, steel, copper on the materials side and seeking even more tariffs on lumber was not and is not a great idea for keeping prices and costs contained. Auto tariffs under Section 232 are extreme even after the array of “deals” and could go higher if the USMCA breaks down in 2026. We saw semis, pharma, and aircraft/engines/parts added to the Section 232 pipeline although most of the aircraft/parts risk was mitigated in EU talks. Recent period brought in commercial vehicles, branded pharma, cabinets, and a range of targets on national security grounds including upholstered furniture.

The IEEPA tariffs were just struck down by the Supreme Court in a 6-3 vote (Thomas, Alito, and Kavanaugh dissent). That will change the dynamics of trade deals from here even if Team Trump has been contingency planning. There are other trade and tariff remedies but we don’t expect those will cover threatening Europe with tariffs if they do not allow annexation of Greenland or hitting Brazil with massive tariffs for jailing Trump’s “coup bro.” Those tactics should be over.

The above chart covers the time horizon for DPI vs. PCE from early 2022 as the tightening cycle kicked into gear after March 2022. Life in Jan 2022 was still quiet for Disposable Personal Income. We like to include this and the prior chart just given the heavy mix of disinformation and politically axed story lines we constantly hear from Trump on Biden being the cause of all the macro problems at the end of 2025.

The above table plots the monthly Disposable Personal Income MoM change numbers vs. the Personal Consumption Expenditure MoM numbers across the years from 2019 through Dec 2025. It is an easy scan across key time periods for a look at turning points in DPI (e.g. stimulus payments) or PCE.

It is always worth remembering that a tariff is a regressive tax that hits lower income consumers harder and the same for small businesses. The same is true in Medicaid costs based on the income brackets of Medicaid users. A loss of health care benefits and higher pharma costs is a zero-sum game with other consumption lines. The current ACA premium spikes will also be a zero sum “game” for many budgets.

The above chart updates the savings rate history with the latest number down slightly to 3.6% after 4.9% as recently as May (as revised). We have looked at the savings rate dynamics in earlier commentaries (see Savings Rates: Context Across the Cycles 10-27-23). Savings rates peak in times of worry (occasionally panic) as evident in the chart above. As of now, households are clearly spending even if some more come to regret it when credit card bills come due.

The period leading into May 1975 was no picnic after the massive stagflation bout and the same was true in Nov 1981. Dec 1992 had a raft of issues as the commercial real estate bubble was bursting (and hammering some banks), the leveraged finance boom was on the back end of the default cycle, the thrift crisis effects were still playing out across some major regional economies (notably TX and CA), and the regional oil patch pain that had come home to roost in 1987-1990 was lingering.

CPI Jan 2026: Reassuring Numbers, Missing Pieces

Glenn Reynolds, CFA — Fri, 13 Feb 2026 21:30:00 GMT

Show me the health care insurance inflation.

The overall CPI picture brought good news just by going down to 2.4% in total (vs. 2.7% in Dec 2025) while core CPI weighed in at +2.5% (vs. 2.6% in Dec 2025). As the Washington noisemakers turns up the volume (as usual), the reality is that +2.4% by definition means aggregate prices are rising (that is why they call it inflation – even when it is low). The good news is that inflation is slower than wage growth as covered in the CPI report as well as the 4Q25 Employment Cost Index report this week.
A granular dive into CPI lines still reveals pockets of affordability pain in areas that matter to consumers (and voters). The partisan talking heads on the right will run right past those lines. The partisans on the left will scream affordability problems even with lower CPI. The fact is the Jan 2026 CPI numbers mark an improvement in aggregate for consumers with pockets of bad news as well. What manufacturers and service providers had to “eat” in tariff costs lurks behind the CPI metrics.
Some CPI lines reveal a disconnect between the BLS methodology and household cash flow reality. A notable example is Health Insurance premiums as a headline topic and household crisis for many. Health Insurance weighed in for January at -2.2% YoY and -1.0% MoM from Dec 2025. As in housing and the infamous OER metric, the BLS has its own distinctive approach to measuring health insurance CPI. We have not yet seen much debate around BLS measurement on health care “deflation” of Jan 2026. Households often live in a cash-in, cash-out world and the OER metrics in housing and health insurance CPI levels are in a different world.
As we detail below, the Medical Care Services line is creeping higher with lines such as “hospital and related services” at 6.9% YoY, “inpatient services” at 7.4%, “dental services” at 5.3%, and “home health care” at 12.7%. We also saw some below-the-headline CPI metrics such as “water, sewer, and trash collection” at 4.7%, “motor vehicle maintenance and repair” at 4.9%, and “postage and delivery” at +5.3%.
Scrolling the columns of CPI can be depressing for many consumers and at times surprising since they are not as well-known as the grocery aisle prices (beef and veal at +15.0%, fresh fish and seafood at 5.7%, coffee at 18.3%, sugar and sweets at +5.7% with candy and chewing gum at 7.5%, etc.).

The above chart runs through the time series for Headline CPI and Core CPI since the start of the COVID year of 2020. By the numbers, the current +2.4% headline CPI is back around a recent Sept 2024 low point noted in the chart.

The time series offers a reminder of the multiple market imbalances that drove the CPI spike in the aftermath of COVID supply crises teamed up with excessive stimulus action.

The chart also offers a look at the first major inflation spike since 1979 brought Volcker into the job by August that year. That period rolled into the mother of all tightening and a double dip stagflation cycle that crushed many bellwether companies.

The pace of the decline in CPI across 2023 really stands out in the chart with the economic expansion continuing and regular record stock market highs into 2024. Those topics tend to not get much mention.

While Trump was slamming Powell and Biden as the most destructive creatures since the primordial soup, the fact is that Biden was only the second President in 50 years to get through his term with no recession months. Clinton was the other recession-free President across two terms but with much better headline and PCE growth years to boast (see Presidential GDP Dance Off: Clinton vs. Trump 7-27-24).

The above chart gives the longer-term history from the bad old days of oil embargoes (late 1973/early 1974) and the late decade stagflation and Volcker. We detail the fed funds rate and headline CPI. The earlier data of the 1970s and early 1980s uses weekly averages, so you don’t see some of the brief 20% fed funds days of that tightening cycle. We cover those histories in some links at the bottom of this commentary.

I occasionally highlight that I arrived in NYC to start work in the month the Misery Index hit 22%. In that context, 2022 looks mild. The CPI and PCE levels quickly corrected into 2023 and into 2024. Powell and the FOMC should be praised for that even if they justifiably can take heat for waiting too long in 2021.

Those who call 2022 “the worst inflation in history” are simply ignorant and/or dishonest (i.e. partisan idiots). The US did not even have a recession in 2022. PCE (consumption) remained high and unemployment low.

The 1980-1982 double dip was a radically different backdrop than 2022 (see Unemployment, Recessions, and the Potter Stewart Rule 10-7-22). The lack of a recession in 2022-2023 was a testament to the diversity of the US economy and the resilience of the consumer. That appears to be playing out again in 2025-2026 even with some mild signs of weakening payroll indicators and despite damaging tariff distortions.

The economic signals may be mixed, but growth is steady even if the White House does not make reality adjustments for the GDP growth rates it cites (see Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26, 3Q25 GDP: Morning After Variables to Ponder 12-27-25).

The above table breaks out some of the special aggregate CPI metrics that slice and dice the high-level index metrics to adjust for some outsized sectors (e.g. ex-shelter). The special index aggregates also narrow in on some key subsector lines (e.g. Services total, Durables, Nondurables). A few more angles on the big picture are always useful. We select some key quarter end dates to fit more data in the table. We had to leave some out.

The takeaway from these Table 3 adjusted CPI metrics bring good news after a stretch in 2025 that saw some unfavorable moves. “All items less shelter” is our favorite, and that CPI measure had trended down nicely into Jan 2026 after moving higher from +1.9% in Dec 2024 to +2.7% in Sept 2025 as shown in the chart. This metric in Jan 2026 at 2.0% is still above 2023-2024 but moving in a better direction.

Services total at +3.2% remains a headache in a services economy such as the US as the “Services” special index comprised 64% of CPI. At +3.2%, the Services CPI is now well below 2023 and 2024. The Services CPI is improving from the higher 3% handle numbers seen in 2025. This category is a win for Trump’s CPI metrics.

We see Durables trending lower, which in turn pushes back on the adverse tariff scenarios. Even in that case of good news for Durables inflation, consideration has to be given to cyclical demand trends or the potential margin erosion of the importer/buyer and the need to “eat the tariff cost” from the supplier chain. That can be a major risk from materials and components in the supplier-to-OEM chain.

If Trump crushes Canada or Mexico in the upcoming USMCA review, the downstream buyers may need to review their pricing strategies in 2026. People who pretend the tariff debate is over are engaged in wishful thinking. There is a lot of trade noise and decisions ahead.

The Big 5 buckets are broken out above. These 5 groupings dominate the CPI weighting with shelter at a disproportionately high 35.6% weighting in the CPI. As noted in the table, food and the total mix of auto lines are a distant second and third.

Shelter CPI stubborn as measured by BLS…

As covered in numerous past commentaries, the Shelter CPI is heavily influenced by a derived metric called “Owners’ Equivalent Rent” that is over 26% of the total CPI. The disconnect from cash reality is that a homeowner with a low 3% mortgage is not seeing his cash flow experience change as his home rises in value and his monthly payment remains unchanged. That homeowner is in fact seeing no change in his core shelter costs. That said, electricity, piped gas, insurance, furnishings, and the goods in the home are seeing price increases. The BLS does not use home prices and related financing costs in CPI since it changed its methodology back in the early 1980s.

Autos protected by OEM pricing and costly defense of retail markets…

We have put together a profile of Automotive sector CPI given its outsized role in household budgets (see Automotive Inflation: More than Meets the Eye10-17-22). We don’t include gasoline in the auto CPI since we have that over in Energy.

The good news for those buying new or used vehicles is that the new vehicle market has seen the OEMs step up to eat much of the tariff costs (for now) in the interest of preserving volumes and supporting dealers. That is likely to change gradually over time. GM especially has been active in planning to relocate production capacity to the US as additional measures to ease tariff margin pressures (see Credit Profile: General Motors and GM Financial 10-9-25).

Medical Care CPI rising while flawed health insurance metric “deflates”…

As noted above, the health care metrics come with some very big asterisks for health insurance inflation. We can’t wait for some White House talking heads to cite the deflation in health insurance as premiums spike. They would not be pressed by CNBC on the topic since CNBC wants to take share away from Fox News and keep the guests coming back.

As noted in the bullets, the Medical Care Services lines are troubling. While the headline “medical care services” line posts 3.9%, that includes -2.2% for “health insurance.” The BLS is not opening the mail for those seeing massive premium increases. We see 6.9% for “hospital and related services” with 7.4% for “inpatient services” within that group and 6.1% for “outpatient.” “Home health care” at 12.7% and 4.8% for “nursing homes and adult day services” also tell a story for the boomers and their families.

Energy always a mixed bag across oil, electricity, and piped gas…

Energy inflation gets simplified in political spin as being all about oil and gasoline, but the real challenge has been electricity and piped utilities gas. Total energy weighed in at -0.1% YoY but “Energy Services” (electricity and piped gas) posted 7.2% CPI with its 3.3% index weighting. The “energy commodities” (primarily gasoline) posted -7.3% CPI with its 3.1% index weighting. Oil and natural gas can swing around, but the power grid issues are not going away.

Food comes down to your menu choice…

Food inflation is currently at 2.9% and down from levels seen in 2025 . Food CPI is above 2024, so Trump does not have bragging rights on Food inflation. “Food at home” is notably higher now than in 2024 with the 1% handles of that year while “Food away from home” is more mixed.

The food lines can be a mix of entertaining and depressing, but there is quite a range. Beef and veal at 15.0% with fresh fish and seafood at +5.7% are hitting the protein menu while +18.3% for coffee and +7.5% for candy and chewing gum are undermining those of us more inclined to caffeine and sugar stimulus.

We see some food lines facing pressures on packaging material costs with 5% handles in numerous canned products. Recent exemptions still show up in the YoY numbers but are easing in MoM trends (“exemptions” are another admission by the White House that the “buyer pays’).

The above table is just an add-on to the main Big 5 groupings and bring the two prior boxes to around 87% of the CPI index. The mix in the table represents regular items for many households with 4 higher, 1 negative, and 1 flat. The decline in Recreation Services CPI is notable on the discretionary spending side. Apparel edged higher but remains low. All the tariffs slapped on low cost labor countries from Mexico to Asia will make that Apparel line an interesting one to watch.

Internet Services ticking higher with phones in deflation is another interesting twist on where the major providers are seeing pricing power (or a lack of in the case of telephones). Airline fares tie into jet fuel prices and passenger volumes, and we saw a rise in airline CPI.

See also:

Existing Home Sales Jan 2026 2-12-26

Payrolls Jan 2026: Into the Weeds 2-11-26

Employment Jan 2026: Good Headline, So-So Mix 2-11-26

Retail Sales Dec 2025: Muted Year-End 2-11-26

Market Lookback: Monkey Business 2-9-26

Market Commentary: Asset Returns 2-8-26

Switzerland-US Trade: A Deficit that Glitters 2-3-26

US-Taiwan Trade: Risks Behind the Curtain 2-1-26

Market Commentary: Asset Returns 2-1-26

Trade Deficits: Math Challenge 1-30-26

China Trade: Shrinkage Report 1-28-26

Mexico Trade: Gearing up for More Trade Trouble? 1-27-26

Canada-US Trade: Trump Attack N+1 1-25-26

PCE Income & Outlays Nov 2025: Resilient Consumer, Higher Inflation 1-24-26

3Q25 GDP: Updated Estimate 1-22-26

Industrial Production Dec 2025: CapUte Resilience 1-17-26

Policy Mud on the Wall: Consumer Debt, Residential Mortgages 1-15-26

CPI Dec 2025: Sideways Calms Nerves – For Now 1-13-26

2025 Spread Walks and Multicycle Return Histories 1-5-26

Annual Return Differentials: HY vs. IG Across the Cycles 1-3-26

Total Return Quilt Across Asset Classes 2008-2025 1-2-26

Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26

Market Lookback: Last Call for Unusual Behavior 12-22-25

Some CPI Histories:

Inflation: The Grocery Price Thing vs. Energy 12-16-24

Inflation Timelines: Cyclical Histories, Key CPI Buckets11-20-23

Fed Funds – Inflation Differentials: Strange History 7-1-23

Fed Funds, CPI, and the Stairway to Where? 10-20-22

Automotive Inflation: More than Meets the Eye10-17-22

PCE Income & Outlays Nov 2025: Resilient Consumer, Higher Inflation

Glenn Reynolds, CFA — Sat, 24 Jan 2026 20:06:02 GMT

While the “soft” indicators such as sentiment/confidence have their value, the rubber meets the road in how households spend relative to their income levels. Sometimes the higher spending is by choice (recreation) and sometimes by necessity (health care). The income and outlays data for Nov still shows sequential MoM growth in personal consumption expenditures (PCE) running ahead of income growth.
Growth of +0.5% for total PCE, 0.7% for goods, and services at +0.4% outpaced disposable Income growth at +0.3%. The personal savings rate ticked lower to 3.5, down from 5.5% as recently as May.
PCE inflation ticked higher YoY to +2.8% in Nov from +2.7% in Oct for both headline PCE prices and Core PCE. That is going in the wrong direction, and fresh tariffs would not have helped with the USMCA also up for review by midyear and Trump threatening both nations already. Canada was threatened with 100% tariffs on Saturday. The headline PCE price index of +2.8% is up from 2.3% in April with Services stubborn at +3.4% and Energy Goods and Services moving notably higher to +4.1% in Nov from 2.2% in Oct and even deflation as recently as August.
We will find out in later releases how consumers felt about Trump losing his mind and threatening to invade a NATO ally. Trump stepped back from the brink for reasons that are more mired in disinformation than the reality of what he factually got in return. Someone (not just the equity markets) must have conveyed to Trump that his action gave the largest trading partner (EU) the domestic political cover to go toe-to-toe in a trade war where everyone loses.
A fresh trade war where the EU and perhaps later Canada and Mexico fight back could unsettle Trump’s FOMC ambitions if the Senate held up appointees while the market also could cast its vote on the long end of the yield curve. Disaster averted for now.

The above chart updates the time series for “fed funds minus core PCE.” The PCE inflation metric tends to be a focal point for the FOMC and economists, but the pressure on energy costs (notably electricity and utility piped gas) and food inflation are stimulating household attention spans in a midterm election year.

The long-term median on the FF vs. PCE differential is 1.5%, but recent easing has sent that metric down by almost a half point to 0.84. The Trump saber-rattling focuses on an immediate move to negative real fed funds rates by the Fed, but that is easier said than done with inflation well above target and the economy doing better.

The FOMC rhetoric will not get easier with Fed independence under siege and SCOTUS rulings pending. The macro story has been waiting for top line fixed investment numbers to kick into gear to back up all the talk on capex commitments. Gross Private Domestic Investment is not adding much at all to this point (see 3Q25 GDP: Updated Estimate 1-22-26).

Finding cyclical trigger points for recession or contraction…

As we have often highlighted in the past, historical cycles from the early 1990s through the 2-month COVID contraction show that it takes quite a bit of pain to cause an economic recession. Two of the longest expansions in history were brought down by crises.

The decisions on timing out of NBER on recession timelines tend to lag the economic “events” by substantial periods (see Business Cycles: The Recession Dating Game 10-10-22). It is hard to find a trigger point for a recession at this point. We just avoided one as Trump missed a self-inflicted crisis by threatening to invade a NATO ally and starting a trade war.

For the past trigger points, we saw an unfolding housing sector bubble in 2006 that led to a housing implosion and systemic banking crisis at the end of 2007. That brought the longest recession since the Great Depression. Before that, the TMT bubble implosion brought an end to what was at that time the longest expansion. That tech bubble recession (March 2001-Nov 2001) was mild and brief but brought the hyper-easing by Greenspan discussed in other commentaries (see Greenspan’s Last Hurrah: His Wild Finish Before the Crisis 10-20-22).

There are plenty of cyclical stories to tell whether it be around economic cycles, monetary cycles or “credit cycles” with the occasional tendency of originators and fee generators to go off the rails (see UST Moves: 1988-1989 Credit Cycle Swoon 10-20-23, UST Moves: The 1990-1991 Risk Factor Pig Pile 10-24-23).

The bull markets of the 1980s gave way to contraction by the summer of 1990 as the cumulative effects of an oil patch crisis, an S&L crisis, leveraged buyout excess with dubious lending standards in LBOs and real estate, and securities industry stress (Drexel Chapter11, First Boston bailout by Credit Suisse, Lehman bailout by Amex, GE bailout of Kidder). That all took a toll and was inflamed by Iraq invading Kuwait and causing a fresh consumer scare and a brief oil shock.

The most recent rise in recession odds was fall 2022, but the consumer kept spending and payrolls were impressive (see Unemployment, Recessions, and the Potter Stewart Rule10-7-22). Biden’s single term joined Clinton’s two terms as the only Presidential administrations with no recession months going back 60 years.

The above is a long way of saying that the largest, most diversified, and most service-intensive economy in history is hard to derail as hard as Washington and whatever idiots (from either party) might try. Going to war with NATO countries would have done it. All Trump had to say in the midst of all of that incoherent Davos blather was “we will not use force to take Greenland.” That took a big cyclical trigger for multiple trade wars off the table.

Extrapolation to speculative outcomes is very subjective, but starting a war with a NATO nation would make the top 3 moronic moves of all time in the 250-year history of the US. The EU will get a gut-check on cowardice as they seek to avoid stooping to the level of the Senate GOP.

The above chart updates the long-term time series from 1972 for PCE vs. core PCE across the decades and cycles. We see the 2.6% headline PCE long-term median in the lower left (below the current 2.8%) and the 2.5% core PCE median (vs. current 2.8%). That is dramatically better than where we came from in 2022 but still well above the 2.0% target.

The Nov 2025 PCE numbers are at reasonable levels in long-term context, but they are in somewhat of a stall with numerous key lines going in the wrong direction. The 2.8% is well above the 2.3% posted in April, and the flowthrough effect of tariffs are hard to deny. Even if one seeks to embrace the “one-time event” theme, that higher price levels still can bring reduced purchasing power for select line items – subject to a household’s typical “basket” (coffee drinkers and beef eaters take note). The supplemental market-based PCE metric was +2.5% in Nov vs. 2.0% in April.

In the move from early spring to Nov 2025, we see Goods moving from -0.3% deflation to +1.4% inflation. We see Energy Goods and Services move from -4.2% deflation in April to +4.1% inflation in Nov 2025. Services remain sticky at +3.4% in Nov, down slightly from +3.5% in April. When you hear the refrain of “prices are way down” in the White House rambling routines, it is simply not true.

We have a few timeline charts that we like to include with our PCE updates as a reminder of how income and consumption framed up coming out of the COVID crisis with its many glaring structural imbalances in supply and demand (remember empty used car lots?).

While old school inflation economists will religiously chant “all inflation is monetary” just substitute “purchasing power” for inflation and you can leave the lecture hall and get back to the sea level reality of how much smaller your goods and service basket might be after prices climb. The semantics of inflation vs. affordability tends to get garbled in all the rhetoric – especially when financing costs get ignored.

The DPI waves in the stimulus and relief policies…

The above chart covers the time horizon for DPI vs. PCE from early 2022 as the tightening cycle kicked into gear after March 2022. Life in Jan 2022 was still relatively quiet for Disposable Personal Income relative to the hyperactive COVID stimulus actions and clean energy legislation.

We like to include this chart and the following longer timeline just given the heavy mix of disinformation and politically axed story lines we constantly hear from Trump on Biden being the cause of all the macro problems during 2025 (Putin oil and gas shock anyone?).

Excess stimulus was definitely a major factor in driving supply-demand imbalances coming out of COVID. That said, you would be hard pressed to find a sentence coming out of Trump’s mouth – or any of his rather vocal team – that speaks to the Russian invasion of Ukraine in Feb 2022 that roiled the energy markets with the spike in oil and gas prices. While that can be seen as the same old ugly politics, the eerily close relationship of Trump with Putin has only become more worrisome across time with Trump’s “friends and family” collection (e.g. Witkoff) thinking about the dollars to be made in Russia in the future.

The stimulus overload of 2021…

Looking back from 2019, the COVID crash brought ZIRP and a fresh game clock after the vaccine. The 2021 period was a big macro rebound in GDP with pent-up demand off the charts. The strong macro backdrop in 2021 and heavy dose of fiscal accommodation did not mesh well with residual supply-side shortages in goods broadly as 2022 saw the end of ZIRP and a material inflation spike.

The COVID relief binge…

As a reminder, Trump signed the CARES Act in March 2020 (shows up in the DPI in April 2020) and Trump also signed the Dec 2020 legislation disbursed in Jan 2021 (Trump seldom mentioned that Dec 2020 check since it was easier to blame Biden and Powell). Biden signed the America Rescue Plan (disbursed in March 2021) that was a demand pile-on (we would argue over the-top-stimulus) in a supply-constrained environment (thus inflation). The DPI and PCE wave tied to each of those shows up in the chart above.

COVID was a distinct period for supply chains and supply-demand imbalances. With tariffs and potential trade war risk that just flared up again in recent days (EU vs. US), it will remain important to look for similar imbalances whether in narrow product categories or in broad commodities and materials areas.

So far, the major trade partners have not initiated much in retaliation with the exception of a brief China spat. That has mitigated the damage, but that de facto submission could come back to haunt some major trade partners if others run for office with a “get tough” election pitch.

We face a review of the USMCA dead ahead, and Trump’s relations with Canada and Mexico are worse than ever. He has threatened to take military action against Mexico around the cartels while Canada, which has been an annexation talking point using “economic coercion” has many of the attributes that Trump praised in Greenland around “arctic security.” Canada is also a critical supplier of natural resources as we have addressed in past trade commentaries (see US-Canada Trade: 35% Tariff Warning 7-11-25, Trade Exposure: US-Canada Import/Export Mix 2024 2-7-25).

With Carney standing up to Trump at Davos and looking to China and EU to broaden trade partner diversity, Trump is gunning for Canada. Trump has also been issuing cartel military threats against Mexico, so the sovereign rights topic could also go down a dark path there. Lurking in the “Donroe Doctrine” rhetorical noise are threats against Colombia and Panama.

The above table plots the monthly Disposable Personal Income MoM change numbers vs. the Personal Consumption Expenditure MoM numbers across the years from 2019 through Nov 2025. It is an easy scan across key time periods for a look at turning points in DPI (e.g. stimulus payments) or PCE. Table 1 in the monthly PCE release shows total dollar amounts on each line.

The line items can sometimes show some volatility. We like to look for gaps between DPI and PCE and moves in Personal Savings. PCE growth has outpaced DPI since spring 2025. As of Nov 2025 we see PCE growth higher than DPI for 7 straight months. That came after 3 of the first 4 months of 2025 saw DPI ahead of PCE.

Any reader of Table 1 can simply tick off which lines might come under pressure in the coming months. Examples include expense lines such as Medicaid (post tax bill) or durable goods that face tariffs.

It is always worth remembering that a tariff is a regressive tax that hits lower income consumers harder and the same for small businesses. The same is true in Medicaid costs based on the income brackets of Medicaid users. A loss of health care benefits and higher pharma costs is a zero-sum game with other consumption lines. The current ACA premium spikes will also be a zero sum “game” for many budgets in 2026.

The above chart updates the savings rate time series across time. It is one of those data series that seems to be on the other side of serial revisions. The current 3.5% is dramatically below the long-term median of 6.8% as shown in the chart. The old adage of “never bet against the US consumer” is backed up by what we are seeing so far since COVID – regardless of who is in office.

We have looked at the savings rate dynamics in earlier commentaries (see Savings Rates: Context Across the Cycles 10-27-23). The savings rate peaks in times of worry (occasionally panic) as evident in the chart above. As of now, households are clearly spending even if some might come to regret it when credit card bills come due.

Among notable savings rate increases as households played defense, we see the period leading into May 1975 was no picnic after the massive stagflation bout. The same was true in Nov 1981. Dec 1992 had a raft of issues as the commercial real estate bubble was bursting (and hammering some banks), the leveraged finance boom was on the back end of the default cycle, the thrift crisis effects were still playing out across some major regional economies (notably TX and CA), and the regional oil patch pain that had come home to roost in 1987-1990 was lingering.

See also:

3Q25 GDP: Updated Estimate 1-22-26

Industrial Production Dec 2025: CapUte Resilience 1-17-26

Existing Home Sales Dec 2025: Getting up off the Mat? 1-16-26

Policy Mud on the Wall: Consumer Debt, Residential Mortgages 1-15-26

CPI Dec 2025: Sideways Calms Nerves – For Now 1-13-26

Payrolls Dec 2025 and FY 2025: Into the Weeds 1-10-26

JOLTS Nov 2025: Job Openings and Hires Down, Layoffs Lower 1-7-26

2025 Spread Walks and Multicycle Return Histories 1-5-26

Annual Return Differentials: HY vs. IG Across the Cycles 1-3-26

Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26

Total Return Quilt Across Asset Classes 2008-2025 1-2-26

Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26

3Q25 GDP: Morning After Variables to Ponder 12-27-25

Durable Goods Oct25: Core Capex Still in Gear 12-23-25

Market Lookback: Last Call for Unusual Behavior 12-22-25

3Q25 GDP: Morning After Variables to Ponder 12-27-25

CPI Dec 2025: Sideways Calms Nerves – For Now

Glenn Reynolds, CFA — Wed, 14 Jan 2026 04:51:53 GMT

Are we there yet?

The CPI release did not bring much of a catalyst for more or less worry in either direction since much of the action still lies ahead. Services at 64% of the index and 3.3% YoY remains a sticky line item that will remain a headwind to material progress toward the 2% target area.
CPI ex-Shelter at 2.4% is reassuring since it ticked lower sequentially from 2.6%. The less comforting fact of life is that corporate America still faces a lot of planning around the pricing of tariffed goods with the need to handicap price increases or cost cutting. Tariff mitigation offsets in turn can bring payroll risk and capex reassessment.
The minimal health care insurance CPI of -0.5% YoY raises eyebrows. Health care inflation is the wildest of the wildcards as health insurance premium spikes will not get into the numbers until further into 1Q26.
Oil is another factor that can always move the needle on CPI (despite the fact that Trump never mentions Putin’s invasion in his diatribes on Biden inflation), and we are entering another one of those periods of oil price uncertainty with Venezuela chaos and a brewing mess with Iran.

The above chart updates the historical relationship between fed funds and CPI. It’s worth keeping in mind that Trump would like this relationship to be flipped with fed funds below 1% as he has stated in some past comments. That would bring material negative real fed funds. That is not a relationship that the UST slope would smile upon. Steepening would likely be on the long end (controlled by the market) as well as the short end (controlled by the Fed).

The above chart updates the path of Headline CPI vs. Core CPI from the period just before COVID. The long-term medians are from Jan 1973 before the wild ride that began with the oil embargo that started in the Fall of 1973. As Trump speaks of the record inflation under Biden that he “inherited,” he neglects to highlight that in Biden’s last full month in office (Dec 2024), inflation stood at 2.9%. Trump’s starting point is Jan 2025 - not June 2022.

We would argue that Powell and the FOMC did a masterful job handling the inflation spike even if they were late to the party. It is worth highlighting only two Presidents since 1980 finished their term(s) with no recession months. Those two Presidents are Clinton and Biden.

The above chart updates our favorite “CPI ex” collection from Table 3 of the CPI release. With Shelter CPI of less analytical value than what the BLS might have planned on when it changed shelter CPI methodology in the early 1980s, we tend to see CPI ex-Shelter as the best headline number to consider. Shelter also comprises 35.5% of the CPI index, so a low quality, theoretical, derived number does not help clarity in calling the inflation pressure. That is why we prefer getting into the product and services lines.

Core CPI had been the favorite of the Fed, but Food (13.7% index weighting) and Energy (6.3% CPI index weighting) are among the two most important drivers of how households feel.

As we cover below, total food ticked higher in YoY metrics with total Food, Food at home, and Food away from home all higher. That does not make consumers happy. For Energy, oil prices have helped gasoline but as we cover in other charts below, Energy Services (7.7 % CPI YoY) such as Electricity (6.7% YoY) and Utility (piped) gas (10.8% YoY) were ugly outliers.

The special CPI aggregate for All items less food, shelter and energy, barely moved lower from 2.3% YoY to 2.2% so that is at least mild by the standards of inflation. That line also underscores the stable month.

The above chart is the main event of the CPI release with the Big 5 buckets posting an index weighting at around ¾ of total CPI. The most interesting lines to watch over the next few months will be Health Insurance and Energy. The new health insurance premiums cycle will move the needle if the BLS is remotely accurate in their measurement.

Energy could go back into one of those modes where military actions create questions around a big move. Whenever Iran comes up, the headlines around OPEC supply logjams (Strait of Hormuz) always get airtime before it fades (unless it doesn’t). That could get tested again if the fanatical leadership of Iran gets painted into a corner. The threat to them now is higher than bombing with “regime change” chatter in the air. We have seen this movie before (in 2003).

We rolled up our own Automotive CPI mix above to remind people what a dominant role the cost of a vehicle plays in the life of so many US households in what is a “driving country.” The 11.5% mix of CPI in the chart excludes gasoline, which would move automotive index CPI share ahead of food (see Automotive Inflation: More than Meets the Eye 10-17-22). Shelter remains by far the leader in CPI index share.

The new vehicle CPI is down closer to zero at 0.3% as the OEMs have been very disciplined and eaten the costs to protect strong sales volumes and healthy retail networks. Those decisions will be revisited this year as the OEMs work with suppliers and watch consumer demand. The good news for tariff policy is that the OEMs are spending billions in capex to move more production capacity back to the US

.The above chart details some popular line items in the life of US households. Recreation Services rose notably to 4.0% this month. That can be a “glass half full” inflation issue since it also says consumers are spending on such discretionary items.

A big question into 2026 is how Apparel will play out given the tariffs on ‘labor arb” trading partners in Asia. At 0.6%, Apparel CPI has not made a dent yet even after the holiday season. That will be a line to watch. Food, electric bills, heating the home, and filling up the gas tank can wag voter sentiment in an election year. That also applies to apparel. We do not see likelihood of material reshoring of Apparel to the US.

JOLTS Nov 2025: Job Openings and Hires Down, Layoffs Lower 1-7-26

2025 Spread Walks and Multicycle Return Histories 1-5-26

Annual Return Differentials: HY vs. IG Across the Cycles 1-3-26

Total Return Quilt Across Asset Classes 2008-2025 1-2-26

Cyclical Histories: Will Facts Be in Vogue in 2026? 1-2-26

3Q25 GDP: Morning After Variables to Ponder 12-27-25

Durable Goods Oct25: Core Capex Still in Gear 12-23-25

Market Lookback: Last Call for Unusual Behavior 12-22-25

Existing Home Sales Nov 2025 12-21-25

November CPI: Tricky Navigation 12-18-25

Some CPI Histories:

Inflation: The Grocery Price Thing vs. Energy 12-16-24

Inflation Timelines: Cyclical Histories, Key CPI Buckets11-20-23

Fed Funds – Inflation Differentials: Strange History 7-1-23

Fed Funds, CPI, and the Stairway to Where? 10-20-22

Automotive Inflation: More than Meets the Eye10-17-22

November CPI: Tricky Navigation

Glenn Reynolds, CFA — Thu, 18 Dec 2025 21:29:25 GMT

Row faster.

After a Sept PCE reading that was going the wrong way in YoY numbers along the major line items (food, energy, goods), the headline and core CPI numbers moved more comfortably below the 3% line in Nov. Trump can now say Nov headline CPI is below Dec 2024 CPI (Biden’s last full month). That was not the case in September (see PCE, Income & Outlays: Calendar Gap Closing 12-5-25, CPI September 2025: Headline Up, Core Down 10-24-25).
The affordability challenge remains but looks better in this month’s release. The next major challenge will be the direction of health care with the premium reset after the ACA hammer comes down. Total Energy CPI remains high at +4.2% despite some oil price support. Medical Care Services weighed in at +3.3% YoY, which is down notably from 3.9% in Sept. Health Insurance was only +0.6%. Those two lines will go into the “hang onto your hat” category as we wade into 2026 and the moving parts of health care premiums unfold.
There are always good and bad lines in these releases, and the bottom line is 2.7% headline CPI and 2.6% Core CPI have a lot going on under the hood. Positive inflation means prices are higher and will remain higher, so the “prices are down” nonsense needs deflation to be an accurate statement. No economist outside a straight jacket wants deflation. That said, prices are up overall. That is why they call it “positive inflation.”
For now, this CPI is good news and helps the easing bulls craft a story when taken in tandem with the weak Nov jobs performance (see Employment Nov 2025: Bad News is Bad News 12-16-25). As we go to print, we see the 10Y edging a few bps lower, but much lies ahead as more pricing decisions are made by buyers of goods under tariffs, and the health care (ACA premiums) fiasco flows into consumer budgets.
This best news is the decline in Food inflation YoY to 2.6% from 3.1% in Sept and the worst news is the increase in total Energy inflation to +4.2% in Nov from +2.8% in Sept with Electricity at +6.9%, Utility (Piped) Gas Services at +9.1% and Fuel Oil at +11.3%. Gasoline at +0.9% takes the edge off, and there are more than a few forecasters calling for oil to collapse, which in turn would be a windfall for the consumer.

The above chart updates the key goods and services CPI lines we break out each month. They add up to around 75% of CPI. This month we will skip the long-term timelines and stay in the product groups. For the Headline vs. Core history and fed funds vs. headline CPI relationships (see CPI September 2025: Headline Up, Core Down 10-24-25).

We highlight that the above chart details the weighting based on Sept numbers since October metrics are not available. The relative dominance of Shelter at over 35% of the CPI index weighting puts an asterisk on the number, so CPI ex-Shelter is a good proxy as detailed further below.

When affordable housing comes up as a topic, the cash economics have very little to do with the shelter CPI number given the changes back in the early 1980s on how shelter CPI is measured. We have covered that in past commentaries.

The shelter CPI is a derived theoretical number tied to rent (“Owners Equivalent Rent” or OER). That is unlike the data you would see in the late 1970s tied more to price and mortgage rates. Either way, housing affordability needs lower mortgage rates and more supply. That challenge remains as does the need to unlock more existing home sales. NAR’s existing home sales report will be released tomorrow.

The reality for the homebuyer can be more simply framed with the questions: “How much does the house cost?” and “What are my monthly payments? That math is still brutal in the post-COVID cycle.

It is easy enough to dig into the line items to see some tariff impacts in some of the goods line items such as “living room, kitchen, and dining room furniture” (+4.6%), “tools, hardware and supplies” (+5.6%), and “audio equipment” (+10.2%). We see “women’s outerwear” (7.4%) and “women’s dresses” (+5.6%), but those and other product line CPI measures will be playing out gradually across 2026. What the tariffs are costing small business lines and retailers on the “cost of sales” line is a slow and steady pain analysis.

Those of us that are heavy coffee drinkers (+18.8%), eat meat (+8.9 with +15.8% beef and veal), like sugar and sweets (+6.8%) will pay more, but the good news is that Food at Home is down to +1.9% YoY from +2.7% in Sept. “Frozen fish and seafood” weighed in at +11.6%. Eggs are down by -13.6% now that Trump has cured avian flu (he looks great in a white coat, sets off the orange).

“Food Away from Home” at +3.7% (flat to Sept) is more stubborn but has more moving parts with costs to recapture. The “Energy prices are down” Jedi Mind Trick about oil does not change the reality that total Energy inflation remains a problem at +4.2% despite only +0.9% on gasoline. Energy Services overall weighed in at +7.4%.

We always look to the adjusted CPI aggregates in Table 3 for some other vantage points. “All items less shelter” at 2.6% is above the Dec 2024 level of 1.9% while “All items less food, shelter, and energy” ticked up to 2.3% in Nov 2025 from 2.1% in Dec 2024.

For tariff signals, we see Durables at +1.5% vs. the deflation of Dec 2024 and Dec 2023. Nondurables posted +2.0% or almost 2x the Dec 2024 level of 1.1%. In other words, the supplier chain issues are still complex and subject to the test of time.

For Services, the mid-3% handle mix of the various services lines above continues to challenge the price mix across various layers presented above.

See other Inflation Related:

PCE, Income & Outlays: Calendar Gap Closing 12-5-25

Retail Gasoline Prices: Biblical Power to Control Global Commodities 11-13-25

CPI September 2025: Headline Up, Core Down 10-24-25

PCE August 2025: Very Slow Fuse 9-26-25

FOMC: Curve Scenarios Take Wing, Steepen for Now 9-17-25

CPI August 2025: Slow Burn or Fleeting Adjustment? 9-11-25

PPI Aug 2025: For my next trick… 9-10-25

PCE July 2025: Prices, Income and Outlays 8-29-25

Producer Price Index: A Snapshot of the Moving Parts 8-14-25

CPI July 2025: Slow Erosion of Purchasing Power 8-12-25

PCE June 2025: Prices, Income, and Outlays 7-31-25

Employment Cost Index 2Q25: Labor in Quiet Mode 7-31-25

CPI June 2025: Slow Flowthrough but Starting 7-15-25

PCE May 2025: Personal Income and Outlays 6-27-25

CPI May 2025: The Slow Tariff Policy Grind 6-11-25

Employment Cost Index 1Q25: Labor is Not the Main Worry 5-1-25

Inflation: The Grocery Price Thing vs. Energy 12-16-24

Inflation Timelines: Cyclical Histories, Key CPI Buckets11-20-23

Fed Funds – Inflation Differentials: Strange History 7-1-23

Fed Funds, CPI, and the Stairway to Where? 10-20-22

Automotive Inflation: More than Meets the Eye10-17-22

FOMC: Dot Plot Scatters for 2026

Glenn Reynolds, CFA — Wed, 10 Dec 2025 22:44:58 GMT

Pollock possible Fed Chair for 2026 planning.

The Dec FOMC meeting posted the expected -25 bps cut, but the expectations show a lot of data work and plenty of tension ahead for the FOMC in 2026 with the January meeting a warmup ahead of Fed regime change.
With Trump’s attempted takeover of the Fed and desire to kneecap Fed independence underway, the dot plot mix for Dec 10 highlights that more of the members will not hesitate to aggressively deviate from “consensus.” That comes at a time when the White House is saying “prices are lower” even with aggregate positive inflation. The FOMC will have a hard time ignoring what they know even if that is a cornerstone of Trump economic policy these days (“prices lower, inflation lower, affordability con job,” etc.)
The Dec 2025 dot plot forecast for 2026 showed the Gang of 19 with 3 votes for 1 hike in 2026, 4 votes for no change, 4 votes for 1 cut, 4 votes for 2 cuts, 2 votes for 3 cuts, 1 vote for 4 cuts, and 1 for 6 cuts. 2027 forecast is not much better. What could possibly go wrong?
The biggest median forecast changes from the September forecasts in the new Dec 2025 SEP report was the +0.5% increase in 2026 GDP to 2.3% from 1.8%. The PCE inflation forecast was moved down to +2.4% from +2.6% while Core PCE was notched lower to +2.5% from +2.6%. That is still well above target. The unemployment rate was left flat at 4.4% (which is low in historical context) and the fed funds rate median forecast was unchanged at 3.4% (but across a wider range of forecasts).
The overall macro forecasts do not add up to recession or material macro shortfalls from the consumer or fixed investment. Monetary “implementation” piled onto the relative dove-fest with news of a modified QE Lite for T Bills to boost liquidity and reduce any potential short term rate pressure in money markets (and thus the banks). While this is often described as “plumbing,” it is the bank system that controls the faucets. The Fed controls the liquid in the pipes.

The above chart updates the notable period of shapeshifting for the UST curve since the UST 10Y peak (10-19-23). The period above runs across the FOMC easing that started in Sept 2024 ahead of a bear steepener from Sept 2024 to the current 12-9-25 UST curve. That timeline saw a lot of action from the short end to the long end as we covered in our UST commentaries.

We include the Tuesday (12-9-25) close for UST ahead of today’s modest move. As we wrap the day, we see the 3M -5 bps lower, the 2Y just over -7 bps lower, the 5Y at -4 bps, the 10Y at -3 bps, and 30Y -1.5 bps. The action in the curve needs to be fed a lot more data and more macro noise (e.g. final Fed Chair selection).

Besides payroll and CPI ahead with some long-awaited 3Q25 GDP data, the market will face swirling rumors around the Fed and whether it will be Hassett. It is not 100% certain yet that he will get the Westminster “Best in Show” ribbon in a highly competitive lapdog competition.

The above chart updates the wide band from the COVID UST curve at the end of 2020 to the 10-19-23 peak on the 10Y following the March 2022 end of ZIRP and eventual move into easing mode.

The above chart offers a more granular set of details on the YTD 2025 UST deltas. As we head into 2026, we are having a hard time seeing how this can be replayed with highly unpredictable inflation. If you want to bank on more easing, even if just by Trump “policy by fiat,” through one of his hand-picked Muppets, you can get the front end moving lower, but the dot plot still says there will be a fight over the handicapping for 3 cuts.

Looking further out the UST curve, this is where the UST supply-demand imbalances and inflation threats remain in place. A cratering of oil – which is a popular forecast for some – would be good news for inflation but also bring a “giant tax cut” that would get the consumer feeling good again. A stronger consumer plus tariff effects with healthy demand could get the inflation debate reheated.

With Powell talking about tariffs as a cause of price pressure in goods today, we can assume that Trump will have a litmus test for any new Fed Chair that no such words can be uttered – ever. We are still sticking with the 3M to 10Y steepening scenario and expect the 2Y to 30Y to stay steep (see The Curve: Flying Blind? 11-24-25).

JOLTS: Goldilock’s Ugly Twin 12-9-25

Market Commentary: Asset Returns 12-7-25

Mini Market Lookback: Data Digestion 12-6-25

PCE, Income & Outlays: Calendar Gap Closing 12-5-25

Credit Markets 12-1-25

Mini Market Lookback: Back into the June 2007 Zone 11-29-25

Durable Goods Sep 2025: Quiet Broadening of Core Capex 11-26-25

Retail Sales September 2025: Foot off the Gas 11-25-25

The Curve: Flying Blind? 11-24-25

Mini Market Lookback: FOMC Countdown 11-23-25

Employment Sept 2025: In Data We Trust 11-20-25

Payrolls Sep25: Into the Weeds 11-20-25

Mini Market Lookback: Tariff Policy Shift Tells an Obvious Story 11-15-25

Retail Gasoline Prices: Biblical Power to Control Global Commodities 11-13-25

Aug 2025: Tough math when “total unemployed > job openings” 9-30-25Mini Market

Mini Market Lookback: All that Glitters… 11-8-25

Mini Market Lookback: Not Quite Magnificent Week 11-1-25

Synchrony: Credit Card Bellwether 10-30-25

Existing Home Sales Sept 2025: Staying in a Tight Range 10-26-25

Mini Market Lookback: Absence of Bad News Reigns 10-25-25

CPI September 2025: Headline Up, Core Down 10-24-25

General Motors Update: Same Ride, Smooth Enough 10-23-25

Mini Market Lookback: Healthy Banks, Mixed Economy, Poor Governance 10-18-25Mini Market Lookback: Event Risk Revisited 10-11-25

Credit Profile: General Motors and GM Financial 10-9-25

Mini Market Lookback: Chess? Checkers? Set the game table on fire? 10-4-25JOLTS

Lookback: Market Compartmentalization, Political Chaos 9-27-25

Employment Cost Index 3Q25: Slowing but Above CPI

Glenn Reynolds, CFA — Wed, 10 Dec 2025 18:54:45 GMT

Don’t worry! I got your back on affordability!

At +3.5% YoY, the latest quarterly Employment Cost Index (“ECI”) report shows the ECI moving lower sequentially from 2Q25 at 3.6% and from Sept 2024 at +3.9%. That complicates the affordability debate and Trump’s “Happy Days are Here Again” roadshow. (Simplifying the Affordability Question 11-11-25).
The +3.5% wage rate comes alongside stubborn inflation including 3% handle inflation for total Food in the Sept CPI report and rising YoY inflation for Food and Energy in the most recent PCE report (see PCE, Income & Outlays: Calendar Gap Closing 12-5-25, CPI September 2025: Headline Up, Core Down 10-24-25). Purchasing power has declined in many areas even with wages rising.
In one of the lesser Jedi Mind Tricks of our time, the fixation on national retail gasoline prices gets a lot of air time (see Retail Gasoline Prices: Biblical Power to Control Global Commodities 11-13-25). We heard this again on Trump’s speech circuit last night with the magic “$1.99 per gallon” fantasy. As we ego to print, the AAA index price nationally is $2.94, down from $3.00 a week ago.
Crude oil volatility is largely outside the control of White House policy other than any effort to let Russian supply loose and throw Ukraine under the tank. The focus on gasoline is part of the effort to pretend that electricity inflation (+5.1% in Sept CPI) and Utility Piped Gas (+11.7% in Sept CPI) are not part of the affordability challenge. Pretending Putin did not have the dominant role in the spike in oil, gas, and gasoline in 2022 requires a suspension of disbelief.

The time series for ECI is plotted above, and the post-COVID spike is clear enough as the ECI shot up to the 5% handle zone. The great reopening made for good supply-demand dynamics for labor.

The current compensation growth lines for workers are in fact trending down across the past year and sharply from 2022, so of course Trump cited them as going higher in his rally speech last night. Absolute wages are “higher” (as are consumer prices), but the rate of wage/compensation growth is slowing while many consumer lines are seeing inflation rise. Headline CPI was in fact higher in Sept 2025 than Dec 2024 (see Simplifying the Affordability Question 11-11-25).

For the rolling 3 months, the rate ticked down for civilian wages from +1.0 to +0.8%. The 12-month YoY rate is at +3.5% which is down from +3.9% in 3Q24.

The ECI release has many angles on total comp, wages, and benefits. For example, state and local government workers were down to 3.5% for wages vs. 4.6% in 3Q24. Private industry wages were +3.6% in 3Q25 vs. +3.8% in 3Q24. That means a “lower” rate of increase – not higher.

You could argue that the recent set of numbers in ECI help the FOMC story on pricing pressure (tariffs are still the main event), but it does not tell a good story about worker’s affordability challenges.

In last night’s speech, Trump again cited Trump 1.0 as the greatest economy in US history and anywhere in the history of the world. That one never gets old (see Presidential GDP Dance Off: Clinton vs. Trump 7-27-24, Presidential GDP Dance Off: Reagan vs. Trump 7-27-24). Once again, he cited his view that “prices were down” despite positive inflation. That is unusual math. He tends to use the 2022 inflation spike as his starting point when Dec 2024 (or Jan 2025) is where he came in.

Wages battle inflation…

Meanwhile, inflation is trending higher since Dec 2024 for Food and Energy as the two lines most experienced by households on a daily basis. The political risk tied to food and energy is high, and the White House is scrambling to take pressure off with tariff revisions (notably such lines as coffee and beef). That will ease consumer pain but also put the lie to the cornerstone of Trump’s tariff pitch – the “seller pays.”

With energy, focusing just on gasoline is a sleight of hand for consumers to remember when they pay the electric or gas bill. Crude oil is biased lower, but Sept gasoline deflation was lower than the deflation of Dec 2024 in Biden’s last full month. In the end, most expect oil and gasoline to keep moving lower on supply/demand balance for crude.

As we cover in our employment commentaries, the moving parts of supply and demand for labor are shifting again with mass deportation in a slowing economy. That slowing has been concentrated in the Personal Consumption Expenditure lines and Fixed Investment even if Bessent at al. like to play games with the distortion of import/export lines and changes in inventory in the “year of tariffs” (see 2Q25 GDP Final Estimate: Big Upward Revision 9-25-25, 2Q25 GDP: First Cut of Another Distorted Quarter 7-23-25). We await the first 3Q25 GDP data to arrive on Dec 23^rd).

The above updates the ECI vs. unemployment rates. The relationship is fairly obvious but also highlights how COVID is in a world of its own with the pent-up demand factor for labor as well as goods and services. The current ECI of 3.5% is well above the long-term median of 2.8% (from 2000).

Retail Gasoline Prices: Biblical Power to Control Global Commodities 11-13-25

Employment Cost Index: Labor vs. Capital …Tide Turning or Swirling? 2-1-23

CPI September 2025: Headline Up, Core Down 10-24-25

Inflation: The Grocery Price Thing vs. Energy 12-16-24

Presidential GDP Dance Off: Clinton vs. Trump 7-27-24

Presidential GDP Dance Off: Reagan vs. Trump 7-27-24).

Inflation Timelines: Cyclical Histories, Key CPI Buckets11-20-23

Savings Rates: Context Across the Cycles 10-27-23).

Past ECI commentaries:

Employment Cost Index 2Q25: Labor in Quiet Mode 7-31-25

Employment Cost Index 1Q25: Labor is Not the Main Worry 5-1-25

Employment Cost Index 4Q24: Labor Crossroad Dead Ahead 1-31-25

Employment Cost Index Sept 2024: Positive Trend 10-31-24

The Employment Cost Index June 2024 8-1-24

Employment Cost Index March 2024: Sticky is as Sticky Does 4-30-24

Employment Cost Index Dec 2023: Compensation Mixed Picture 1-31-24

Employment Cost Index Sept 2023: Expect the Expected 10-31-23

Employment Cost Index: Rings of the Redwood 7-28-23

Employment Cost Index: Slow Motion 4-28-23

PCE, Income & Outlays: Calendar Gap Closing

Glenn Reynolds, CFA — Fri, 05 Dec 2025 20:13:47 GMT

Time Jump: We are now back in Sept 2025

A relatively benign set of Sept numbers for PCE inflation still leaves headline PCE inflation and core PCE +0.8 above target at +2.8% for headline PCE (1 tick higher sequentially) and core PCE also +2.8% (1 tick lower sequentially) .
For those tracking calendar 2025 numbers under Trump vs. Biden’s last full month in office (Dec 2024), Trump’s headline PCE inflation is 1 ticks higher than Biden’s +2.6% while the Sept 2025 core PCE is 1 tick lower than Biden’s +2.9%.
In tracking the sequential MoM numbers for inflation signals, the Goods PCE price index has moved materially above recent months at +0.5% MoM vs. +0.1% in August and -0.1% in July. Nondurable Goods posted +0.7% MoM vs. +0.2% in Aug and -0.1% in July. So that signals upward price pressure in Goods.
Goods PCE inflation remains low on a YoY basis at +1.4% but keeps moving notably higher with each new month after being in deflation mode earlier in the year. As we have covered earlier, Energy Goods and Services were notably higher in Sept YoY at +2.7% and a YTD high – in contrast to Trump’s very vocal public statements to the contrary. Food is also higher at +2.4% in Sept and at a high in YTD 2025 (see Retail Gasoline Prices: Biblical Power to Control Global Commodities 11-13-25
Simplifying the Affordability Question 11-11-25)
Meanwhile, Services PCE price inflation YoY is ticking slightly lower sequentially to +3.4% from +3.6% in August and more notably lower from earlier in the year with +3.8% in Feb 2025.
Savings rates are around YTD lows at +4.7% and flat sequentially to August even if down from a high of +5.7% in April. Real disposable income was +1.9% YoY and running below real personal consumption expenditure (PCE) levels of +2.1%. That real PCE level of +2.1% is a low for the year. Durable Goods PCE was down the most to +2.1% from 3.8% in August and highs of +8.6% in March and +7.8% in April.

Given the focus on FOMC policy vs. consumer pressure tied to affordability, we listen to the political noise on the subject to try to filter the spin down to a few basics:

Higher is not lower.
Sideways is not lower.
Higher is not always “high” in historical context.
“Flat” headline can have a lot of moving parts higher, lower and sideways.
There are a lot of line items that matter more to some than others.
Sequential MoM trends can sometimes be more important than YoY.

When we consider the level of tightening that could guard the system against a return to the stagflation of 1980-1982 or 1973-1975, the relationship of fed funds to PCE (or CPI) is critical in terms of the Fed mission. So, the fact that Trump originally wanted to cut fed funds by 300 bps (give or take) was not historically a “prudent” (sane?) statement coming off the highest inflation cycle since the 1980-1982 double dip.

The “Fed Funds minus Core PCE” differential since 1973 offers a read on “real fed funds” and to what extent the Fed is engaged in “real” tightening as opposed to the “closet accommodation” that we saw in much of 2H22 when tightening was moving into higher gear but badly lagging inflation. Trump is essentially calling for negative real fed funds.

The long-term differential of core PCE vs. fed funds is +1.5%, and the differential now is +1.1%. That still leaves room for easing, but the final judgement on actions comes down to how you see the tariff threats, the supply vs. demand side of the equation for goods, payroll economics in a world of mass deportation, household inflation expectations, and what that might mean for stagflation risk.

A glance back at the stagflation years of periods such as 1973 or 1981 and the various
“prevent defense” moves of the 1980s remind us how aggressive the Fed felt the need to be. The idea that Trump would put in a “Fed head” with negligible capital markets experience, a few short roles as a “professional appointee” and time served in conservative think tanks is too similar to what he had planned for the BLS. The stakes for the Fed are dramatically higher than for the BLS, which is bad enough (see Happiness is Doing Your Own Report Card 8-1-25)

Fed independence will not be dead – yet – given the voting structure and “relative” operational independence, but it will clearly be “mostly dead” (to quote Miracle Max).

Fed independence is not dead. Just mostly dead. Mostly dead is slightly alive. - Miracle Max

The forecasts for lower rates and more FOMC cuts in 2026 could soon become a political decision more than an economically justified move, but that is the drama for late spring 2026.

The Sept 2025 PCE numbers are at reasonable levels in long-term context, but they are in somewhat of a stall with numerous key lines going in the wrong direction. The SEP 2024 report and dot plot kept the PCE inflation forecast for 2025 unchanged from June at 3.0% headline and 3.1% core. We still have 3 months to go for reported numbers (Oct, Nov, Dec). It will be very interesting to see how the Fed SEP report and ensuing commentary address these forecasts during a period of very limited economic releases with the shutdown fallout.

The dot plot and forecasts in September were not dovish by any stretch (see FOMC: Curve Scenarios Take Wing, Steepen for Now 9-17-25) and were not materially different from the June meeting (see FOMC Day: PCE Outlook Negative, GDP Expectations Grim 6-18-25). The next set of Fed moves in Dec and Jan decisions come at a time when Trump attacks on macro statistics and independent agencies are nothing short of alarming.

The White House game plan has devolved to attacking the data when it is not supportive or having hired guns investigate the mortgages of select officials who are not on Team Trump. We have a lot of talking heads currying favor with the White House, and we don’t expect a fresh edition of “Profiles in Courage” any time soon.

The above chart frames the long-term differential history between PCE and core PCE since 1972. The long-term differential is zero and we are currently at zero. The volatility around that compressed long-term median ties into the energy wildcard with some food distortions also back in the 1970s. We look at some of the CPI energy and food inflation moves in separate commentaries (see Inflation: The Grocery Price Thing vs. Energy 12-16-24, Inflation Timelines: Cyclical Histories, Key CPI Buckets11-20-23). Food and inflation have been near the top of the affordability political rage-fest. The fact is both energy and food are higher in 2025 and again in the current PCE report.

The above chart looks at a shorter timeline from 1997 to offer a better visual scale separate from the wild 1970s and 1980s. Debate in financial and economic circles rage on around whether the target should be 2.5% or 3.0% or in some other range. The above chart offers a reminder of how hard it is to get to 2.0% or below for headline PCE or core PCE. The earlier chart covers the timeline from the inflationary/stagflationary periods of 1973 to 1982 to hammer that home.

The “1997 to 2025” period also shows a rare stretch at or below the 2.0% PCE line and core PCE median. It took a lot to go wrong in that time horizon to cross that 2.0% threshold. The events along the way included tech bubbles bursting in 2000-2001, oil crashes in the late 1990s and the late 2014 to early 2016 period, and a systemic bank system crisis from 2008 to 2011 (including sovereign stress) to get us there. The COVID pandemic was a new one for the modern capital markets.

In the above timeline, we even see deflation in the post-crisis recession trough in mid-2009. The collapse in oil prices in late 2015 and then the COVID impact in 2020 gave an assist to low PCE. Oil is a big headline mover whenever there is a sharp decline or spike, and we have had plenty of both.

The Biden politics and stimulus definitely had a major inflationary impact on pricing and supply-demand imbalances after COVID. That is also the case with the Russian invasion of Ukraine.

Energy has been in deflation mode for part of 2025, and that helped dampen the inflation headline numbers. As 2025 wore on, energy inflation has gone the other way and notably in areas such as electricity and piped utility gas (see CPI September 2025: Headline Up, Core Down 10-24-25, Simplifying the Affordability Question 11-11-25, Retail Gasoline Prices: Biblical Power to Control Global Commodities 11-13-25).

The above chart covers the time horizon for DPI vs. PCE from early 2022 as the tightening cycle kicked into gear after March 2022. Life in Jan 2022 was still quiet for Disposable Personal Income. We like to include this and the following chart just given the heavy mix of disinformation and politically axed story lines we constantly hear from Trump on Biden being the cause of all the macro problems at the end of 2025.

The stimulus overload of 2021…

Looking back before the start of this chart, the 2021 period was a big macro rebound in GDP off the COVID peak period. The strong macro backdrop in 2021 and heavy dose of fiscal accommodation did not mesh well with residual supply-side shortages in goods broadly as 2022 saw the end of ZIRP and a material inflation spike.

The COVID relief binge…

COVID was a distinct period for supply chains and supply-demand imbalances. With tariffs and potential trade wars, it will remain important to look for similar imbalances whether in narrow product categories or in broad commodities and materials areas. So far, the major trade partners have not initiated much in retaliation with the exception of a brief China spat. That has mitigated the damage but that de facto submission could comes back to haunt some major trade partners if others run for office with a “get tough” election pitch.

Jacking up aluminum, steel, copper on the materials side and seeking even more tariffs on lumber was not and is not a great idea for keeping prices and costs contained. Auto tariffs in Section 232 are extreme even after the array of “deals” and could go higher if the USMCA breaks down in 2026. We saw semis, pharma, and aircraft/engines/parts added to the Section 232 pipeline although most of the aircraft/parts risk was mitigated in EU talks. Recent period brought in commercial vehicles, branded pharma, cabinets, and a range of targets on national security grounds including upholstered furniture (making the world safe for “fat asses.”)

The above table plots the monthly Disposable Personal Income MoM change numbers vs. the Personal Consumption Expenditure MoM numbers across the years from 2019 through July 2025. It is an easy scan across key time periods for a look at turning points in DPI (e.g. stimulus payments) or PCE.

One exercise to do from time to time is to look at Table 1 in the monthly PCE release for the granular dollar amount on each line. The line items can sometimes show some volatility. We like to look for gaps between DPI and PCE and moves in Personal Savings.

Any reader of Table 1 can simply tick off which lines might come under pressure in coming months. Examples include expense lines such as Medicaid (post tax bill) or durable goods that face tariffs. It is always worth remembering that a tariff is a regressive tax that hits lower income consumers harder and the same for small businesses. The same is true in Medicaid costs based on the income brackets of Medicaid users. A loss of health care benefits and higher pharma costs is a zero-sum game with other consumption lines. The current ACA premium spikes will also be a zero sum “game” for many budgets.

The above chart updates the savings rate history with the latest number flat MoM at 4.7% after a 2025 peak in April of 5.7% (as revised). We have looked at the savings rate dynamics in earlier commentaries (see Savings Rates: Context Across the Cycles 10-27-23). Savings rates peak in times of worry (occasionally panic) as evident in the chart above. As of now, households are clearly spending even if some more come to regret it when credit card bills come due.

See also:

Credit Markets 12-1-25

Market Commentary: Asset Returns 11-30-25

Mini Market Lookback: Back into the June 2007 Zone 11-29-25

Durable Goods Sep 2025: Quiet Broadening of Core Capex 11-26-25

Retail Sales September 2025: Foot off the Gas 11-25-25

The Curve: Flying Blind? 11-24-25

Mini Market Lookback: FOMC Countdown 11-23-25

Employment Sept 2025: In Data We Trust 11-20-25

Payrolls Sep25: Into the Weeds 11-20-25

Mini Market Lookback: Tariff Policy Shift Tells an Obvious Story 11-15-25

Retail Gasoline Prices: Biblical Power to Control Global Commodities 11-13-25