CPI Report: Breaking Down the Latest Inflation Data

[00:00:00] Jonathan Levine: All right. Good morning, everyone. My name is Jonathan Levine. I'm a columnist with Bloomberg Opinion, and we are here today to take in today's CPI. Here with me today, I've got Greg Dacco. He's chief economist at EY Parthenon and now the president of the National Association for Business Economics, NAIB. Also here, my colleague, Alison Schrager. She's also a senior fellow at the Manhattan Institute, an author of An Economist Walks into a Brothel, and other unexpected places to understand risk. We're here to take in, as I say, the November CPI report. I'm just glancing over at the Bloomberg survey. On a year-on-year basis, the Bloomberg survey says it'll come in at 3.1%. For CORE, the expectation is that it'll be about 3%. Complicated number because for the most part, the BLS will not publish October CPI values. You'll recall that during the shutdown, the surveyors didn't get the opportunity to go out and survey those items that they do by hand. And so we won't be getting a regular CORE and headline index for the month of October. That complicates the task of producing a year-on-year figure. So because of this, we're really going to be focusing, I think I misspoke, that complicates the task of putting out a seasonally adjusted month-on-month figure. So because of this, we're going to be really focusing on the year-on-year figure and trying our best to avail ourselves of our experts here to understand this complicated print. So Greg, let me send it over to you. How should we be thinking about this number, which obviously has a lot of pitfalls in and of itself and comes at a tricky time for monetary policy? It does come at a really tricky time for [00:02:08] Greg Dacco: monetary policy. And I think one thing that you highlighted, which is very important, is that because of the government shutdown, we did have a lapse in the collection of data. And believe it or not, a large part of the CPI data is still collected manually. So we still have people that go out, BLS people that go out and get prices from stores. And based on those surveys, essentially aggregate them into a CPI index. There are some measures for used car prices, new car prices for some pharma products that are non-survey based. And essentially, we have firms that provide this data. Gasoline prices is another example. The BLS has stated that because it was unable to collect data during the month of October, for all of the survey-based data, it will essentially not have any index. And it will use what it calls a carry forward method, essentially using the prices for September and putting those into the October column. Notwithstanding that, it will have measures for the month of November. Even though collection was only partial in the month of November, there will be an index for November. So we should look at the change in prices as an average change between September and November, being essentially whatever it did from September to November divided by two. [00:03:24] Jonathan Levine: Right. Okay. When you hear how complex this all is, Alison, do you think that there is any chance that we look at this and at the end of our 30 minutes together feel differently about the inflation thesis in the United States of America? Or do we just have to be very, very careful with this number? How are you [00:03:45] Alison Schrager: thinking about it? I think we have to be careful, but I think what we're not going to get is subtlety. Like usually let's each month, it's like, there's a subtle change in inflation that we can really like, aha, like, look at what's going on there. You know, it's five basis points different than it was last month. We're not going to have that. But if there's something really dramatic, like a huge price increase that's happened since, was it September is the last time we've had this data? Well, no, I mean, that will show up in the annual number. So odds are we'll be subtle. So we'll be like, there's not much, we'll be scratching our heads. But hey, if there's like a huge, you know, drop in the inflation rate or a huge increase in the inflation rate, we'll at least know that. Yeah. Well, you know, [00:04:29] Jonathan Levine: going into this, we've had some rough days in the market. It looks like this might be a slightly better one. We do have yields on the 10 year Treasury note drifting down as we head into this number in just about 10 seconds. Big questions about what's going to happen when the clock rolls over in 2026. Are we going to get some fiscal help in 2026 that might change some of the dynamics? So the number comes in, wow. So year on year headline comes in at 2.7%. That's quite a bit below our survey number of 3.16, 3.1. I'm sorry. Core CPI comes in at 2.6%. And that was against our survey expectation of 3%. And so let me just say, first of all, wow. One exercise that I will do here, well, I'll send it over to Greg, but while I get your initial reaction, I want to calculate what's going on here on a two month basis. But Greg, what do you make of this big positive surprise here? [00:05:54] Greg Dacco: Yeah. Well, lower surprise in terms of inflation. And I think it reveals what we were just discussing in terms of the carry forward methodology. Because you essentially hold the prices for most of the CPI basket constant between September and October, you're essentially putting downward pressure on the year over year pace of inflation. And just reading through the report here, it seems that the seasonally adjusted index for all items, less food and energy. So this is core CPI only rose 0.2% over the two months ending in November. So much less of an increase than expected there when it comes to the core item. For September to November, shelter cost increased 0.2%. The energy index rose 1.1% over the two month period. And the all items index, let me see here, also rose 0.2% over the two month period. So that averages to 0.1% on a month to month basis for both months, much, much less than the 0.3% that was initially priced in. So we are getting less inflation. But this is an extremely noisy report, as Allison was saying, a lot of noise. It's very hard [00:07:18] Jonathan Levine: to find the signal from this preliminary read. Yeah. Obviously, a lot of noise, probably as you've laid out, there's a reasonable thesis that this is too good. But even adjusting for that, it's better than you would have, than you would have thought, even if you had taken an optimistic view of the way the noise was going to pan out. Don't you think? Is that an unreasonable extrapolation, Greg? [00:07:46] Greg Dacco: No, I think less pressure than expected. We have to be a little bit careful with the underlying data. I'm still trying to get the precise average increase here for the two months. But it does seem like, essentially, there was downward pressure on the shelter cost front, very low inflation when it comes to shelter costs. We are seeing moderate increases in the data that is non-surveyed. So if you look at used cars prices, they rose 0.7% in October, 0.3% in November. New car prices also rose at a fairly tepid pace, 0.1% in October, 0.2% only in the month of November. And for the gasoline prices, which I was saying is also non-surveyed, we had essentially a decrease of 2.1% in gas prices in October and a rebound to 3% growth in the month of November. So looking at those numbers that where we have non-survey data, essentially there is downward pressure and wherever the BLS essentially used the carry forward methodology, you can see that in the annual pace of inflation, there is essentially a fairly tepid momentum, 2.7% year-over-year inflation as of November. And then core inflation eased to 2.6% from 3%. So also easing on the core inflation front. So much less pressure, as you were saying, than initially anticipated. [00:09:26] Jonathan Levine: Yeah. Alison, give me your reaction as we start to look at inflation prints in sort of the mid-two range. I mean, Greg's given us a lot of caveats, but it feels good to be in the mid-twos. I got to be honest with you. It does something to me psychologically. It does, but this is, I mean, [00:09:49] Alison Schrager: granted noisy, so, you know, all the caveats with that, but it's a fascinating report in a lot of ways because, you know, all we've been hearing about is an affordability crisis and we're seeing prices not go up. But when you look carefully, you can see the affordability crisis in here. Like you're seeing certain food categories, particularly the year-over-year numbers, looking quite large, particularly meat, poultry, fish, and eggs. People keep complaining about egg prices. And you're also seeing a big increase, as Greg pointed out, in energy prices. So I think this is actually revealing a lot about what's going on with affordability, which is shelter costs are going down, which is something people pay for. But at the same time, you know, you have a lot of people who are living in areas where shelter costs are going down, or maybe their existing homeowners. So the shelter inflation never really affected them much anyway, except for like things like insurance or taxes. So while this is like a good report and you're like, wow, you know, cost of living is not rising as fast as it was, and people should be happy. You're also seeing these little pockets of, you know, why people feel like things are getting more expensive, because it is largely the things that impact them and matter to them. And particularly a lot of say necessary goods, you know, that do hit home do look like they've had a substantial increase. [00:11:04] Greg Dacco: Yeah. I think one thing that's also important to Alice's point, when we're talking about the affordability crisis, there tends to be a bias to only focus on prices and on cost. But any type of affordability strain is the confluence is two factors. One, the fact that prices are rising. And two, the fact that incomes are not as high to be able to afford these prices. And I think that's where you're seeing the affordability crisis play out. It's that essentially incomes of many lower to median to even upper median families have been growing at a more subdued pace of late. And that has essentially increased this pressure of higher prices, because it's not really inflation. Inflation is slightly above 2%. Yes, it's around 3%. Yes, it's been above the target for a very long period of time. But I would argue that it's not the 3% inflation issue that really matters for most people. It's the fact that we have had cumulative inflation since 2019 of about 25%. And that wages have risen, but now we're seeing a slower pace of wage growth, and people are worried about their income. [00:12:15] Alison Schrager: Yeah, although, you know, wage growth is real wage growth is still positive for all the lowest income categories. And that's important. So I mean, I see the affordability question is an important one, especially, you know, it's becoming a political priority for both parties. And I think we are having problems sort of wrapping arms around, you know, where is it? What's driving it to some degree, we know? But you know, we get reports like this, and we see it's confusing. It's not like it was in 2021, where just the price levels just going up for everything. It is really just hitting, you know, you can have a very good report like this and still see areas of why people are feeling like life's [00:12:54] Jonathan Levine: getting less affordable. Yeah. Well, let me just say, bringing us back to the monetary policy discussion, you know, monetary policy, of course, does not directly feed into longer term rates, it does not directly affect mortgages. And of course, mortgages are not a part of the CPI basket. But I think in the way that people casually think about affordability, the fact that many types of borrowing costs are elevated is also in the mind of the public, part of the affordability crisis. So there is some big lingering question in the minds of Americans about where are rates going. I think about that in terms of what the Fed does next. And it is interestingly, like if, you know, a very naive interpretation of the data that we got today, coupled with the trend in the unemployment rate, which just stepped up to 4.6%, you would say, okay, it seems like the odds of the Fed doing more easing have really stepped up between these, these two reports. Of course, both of these reports, I think we'll all agree, are littered with a lot of caveats. This one, for all the reasons that Greg has laid out, and the unemployment rate, as well. And so the end result of that, just to give people a sense, is that in the futures market, where we track sort of the market sense of the odds that the Fed is going to do something, we still see just about one in four odds of the Fed moving in January, which I think is interesting, given kind of the big surprises from these two reports. It certainly reflects all the caveats in these reports. And I think it also reflects the fact that we are going to get two more reports before the Fed meets in late January. And I think the market's feeling is like, we're going to hold off, and we're going to, we're going to see then. So Greg, like, how are you thinking about the January move for the Fed? Like what, what kind of alignment of data would we need to see when we get further CPI with less noise, hopefully, and further employment data, hopefully with less noise? What would that need [00:15:35] Greg Dacco: to look like to get the Fed back in the game? I think generally speaking, the Fed and Fed policymakers are trying to answer three questions. One, how weak is the labor market? Two, how persistent is the inflation acceleration? And three, how close are we to neutral? Those are really the three questions that they're trying to answer. And each policymaker has a different view on these. And that's creating this polarization amongst the policymakers. When we look at this data, I think one thing that comes out is essentially, yes, there is still this pass through of tariffs onto consumer prices. And you look at commodities prices, you look at some service price categories, excluding shelter, and you're seeing essentially this upward pressure from tariffs filtering through to inflation. It's not catastrophic. We're not seeing inflation surge to five, six, seven percent, but it is creating upward pressure in terms of prices. So there is some pressure there. Fortunately, there is an offset, a major offset. Actually, this was the largest offset looking at the details from the shelter side of the picture. Shelter cost inflation eased by 0.5 percentage points from three, six to three percent. So you're seeing a notable decrease there of price pressures on the shelter cost front. And that is actually likely to open the door for some that may have been concerned about persistence on the inflation front for more easing. [00:16:58] Alison Schrager: It is extraordinary though. Sorry. Yeah, go, go. Sorry. No, I'm just looking at the year-over-year numbers on things like apparel and it's 0.2, which, you know, is remarkable in a, like, if you told me that I'd reached a point in my life where 15% tariffs sound like, yeah, I can live with that, I would have never expected such a low inflation rate on, like, especially goods that are made abroad. I don't, I just, I don't know what to make of that. There is, yeah, there is fairly limited pressure, [00:17:34] Greg Dacco: though, usually, I mean, this is important to remember, usually apparel prices and most commodities prices fall, they deflate. And so whenever you have a slight increase, that is upward pressure. And that is a difference relative to the deflationary trend, which is, I think, sometimes not understood in how you calculate the effect of tariffs onto prices and inflation. Because generally speaking, a lot of these tariff products are deflating in normal times. And so a departure from that, even if it's a slight departure to the upside, can actually lead to a potentially significant contribution to headline CPI. [00:18:14] Alison Schrager: Still, 0.2%, like 15% tariffs. It's extraordinary. Like, you know, I mean, it is effectively a consumption tax, and you would, because the consumers are a bearing, and it is, I got to admit, like, a lot lower than I [00:18:32] Jonathan Levine: would have expected. Yeah. Well, and there's also the positive way to think about that contribution, right? So I'm looking at Bloomberg's ECAN screen right now, and I'm seeing that in the year-on-year rate for November, you know, core goods contributed 26 basis points. Let's call it 0.3 percentage point to the overall 2.7. So you're telling me that in the absence of the tariff policy, which many people understandably believe is going to fade out of the data as we move through 2026, in the absence of the tariffs, the run rate in this admittedly noisy report is still like 2.4%, which, you know, again, I was saying I felt pretty good about mid twos. You get me under 2.5%, I'm having a party, right? I mean, that is like, that rounds to 2%. It rounds to 2%. [00:19:37] Greg Dacco: But that's why that's why the whole narrative around inflation persistence before the tariffs was misled. I did not understand and still do not understand why most people think there is underlying inflation persistence. There is very little underlying inflation persistence. Some of the factors that have been driving inflation, shelter costs, and market prices, the gains on the stock market front, which lead to some appreciation in market prices, those are not going to last forever. And we're seeing strong disinflationary currents now from the shelter side of the picture, bringing down inflation, inflation, despite the fact, as Alison and you were saying, that we are seeing moderate tariff pressures tariffs across goods. So the question is that next year, though, with what's coming in the pike for [00:20:31] Alison Schrager: fiscal policy, I mean, I could see a lot of different stories about how that's going to affect inflation. Like, there's a lot of tax incentives to expand oil and gas production that are only a couple of years long, so we could expect maybe some fall there. So that might sort of move things along. On the other hand, if we are giving everyone like a $2,000 check, that could sort of move things in the other direction. [00:20:57] Greg Dacco: I'm not a big believer of a massive fiscal stimulus. I know there's a lot of talk of a big fiscal stimulus coming in early 2026. What the OBB, one big beautiful bill, did is essentially prevent a massive fiscal contraction at the start of 2026. But in terms of net fiscal stimulus, it's relatively limited, [00:21:19] Alison Schrager: and there are some pretty significant things in there. I mean, the CBO is expecting almost a 1% increase in GDP next year from it, particularly around the oil and gas. No, the CBO is expecting [00:21:32] Greg Dacco: a 1% increase relative to its January baseline, which included an expiry of the Tax Cuts and Jobs Act. That's the big kick that most people are thinking of as positive stimulus. In terms of net positive stimulus, it's much, much smaller. It's a couple of tenths, three tenths. Maybe if you put that all in the first quarter, you get over 1% points in annualized terms, but it's not a 1% point boost. [00:21:55] Alison Schrager: Well, I agree with you that I'm not expecting much difference for the tax cuts for individuals, because largely we're just extending what people have already had. But as I said, one, if we do somehow get rebate checks through, big if, that could be inflationary. And two, I think the sort of bonus depreciation, that was significant in TGCA. And that has not fully been affected. I mean, that actually wouldn't be very inflationary, because that just sort of increases capital stock and growth and productivity. But as I said, the CBO report also argues that there will be a big expansion in oil and gas, which could lower those prices, which could also be good for inflation. [00:22:35] Greg Dacco: Yeah, I'm very much of the view that the bonus depreciation, 100% bonus depreciation, reinstatement for CapEx investment, and the R&D expensing as well, especially now in the AI age, these are big, big potential boosts to long term growth, because they incentivize greater capital investment. And as you said, over the medium term, they tend to be disinflationary. In the near term, more, greater investment meeting, you know, constrained supply could be slightly inflationary, in fact. [00:23:08] Jonathan Levine: Well, let me just real quickly walk folks through the component. I know our producer has kindly put up the graphic from Bloomberg Bloomberg's ECAN function to help us understand what's driving CPI today. I just want to point out a couple of things. So we've brushed, we've gone over this very, very briefly. But what is contributing to this step down from 3% inflation year on year in September to 2.7% inflation in November? The first big thing is a change in shelter goes from contributing 1.3 percentage points to 1.1 percentage points. So that is absolutely huge. And it's kind of explaining two thirds of what we see in this month. Is it, is there some noise in that from the complications of having missed the October report? I think, uh, I think, uh, certainly, uh, certainly could be, could be the case. But the, uh, you know, the positive read on all of this is that where you really see the step down, just, uh, taking these numbers at face value is in these categories that we like to refer to as super core, right? So, and, and this would have been the concern of, uh, many members of the FOMC in past months, this idea that like, okay, we knew that there was this tariff inflation. We had a strong suspicion that it was going to be temporary, but we were concerned that there were also potentially signs of inflation in some other areas, but the super core, uh, which is essentially core services. So stripping out energy and stripping out, uh, stripping out shelter, a super core steps down from a 3.2% annual pace in September, all the way to 2.7%, uh, and that's in part because of what's going on in the medical service, medical care services, a category. We, we had an important, uh, technical thing happen in the healthcare component, uh, this month, uh, transportation services, which had been upwardly, uh, sort of biased by things that were going on in the automobile insurance space. Uh, we're, we're seeing the contribution from that step down. So I, you know, further to this, this notion that you laid out there, Greg, that there isn't, that there wasn't a lot of underlying upward pressure coming into this, to this year. Do you take, uh, comfort in the, in the fact that this super core measure that we had once been so obsessed with is really stepping down in a, in a major way here? Yeah. I mean, generally speaking, uh, I'm [00:26:26] Greg Dacco: looking at all the details. There isn't much source on the services side of any, any much source of upward pressure. Uh, if you look at transportation services, as you were saying, uh, whether it's airfare, uh, they're actually now down, um, year over year, uh, down zero point, uh, what is it? Uh, sorry, down 5.3 a year over year for, uh, for airfare. Uh, if you look at, um, auto insurance, uh, up three, one, but that's, that's relative to five, three, uh, in September. So a notable easing there. Um, if you look at medical care services, uh, they're also, uh, inflation's 3.3% as of November down from three, nine. So, um, there are, you know, these, uh, areas where there is a strong disinflationary momentum. Um, and to your point, uh, this is, uh, going to be, you know, we'll see what we get in December, because again, there could be a lot of noise and we could be surprised to the upside in December. Um, but if this were the trajectory, um, then I think it, it very much eases any, uh, fear of inflation, underlying inflation persistence in the 3% range. Uh, it seems like underlying all of these, uh, different forces were getting back towards, uh, the 2% fed target. And for those policy makers that were on the fence about easing, because they were concerned about seeing the full pass through of these tariffs onto inflation, I think this opens the door to potentially, uh, greater easing, especially if the labor market continues to, to soften as we have [00:28:02] Jonathan Levine: seen over the last couple of months. Yeah. So, uh, Alison, do you, uh, you think we're going to see anybody on the fed circuit coming out and saying, see, I'm vindicated here. I mean, uh, you know, this looks pretty good for a, um, for, for a Christopher Waller, um, you know, um, Stephen Myron, uh, uh, has been, has been out there. I, I have to say, when you get into the weeds of, of his thesis, um, you know, there's a lot of things that I think you could still, still pick apart. But if he, if his fund is underlying message was that true underlying inflation is not what you're seeing on the surface, he's feeling pretty, pretty decent about himself. Uh, how does this, uh, change the, that conversation? And do you think that it, it boosts anybody's chance in that race for fed chair? [00:28:59] Alison Schrager: I don't know about that. I mean, I feel like we're all living the apprentice with that. Um, but so, you know, it changes minute by minute and we've got, um, you know, although I guess there might be an announcement for the end of the year, so this could be the last one, but, um, it depends. I mean, like any of this data, you can see what you want to see. It's very easy to make a case, inflation's coming down, unemployment's up, you know, we got a cut. Um, but you could also take a harder pass at the data and, you know, say, Hey, you know, real rates really are still pretty low. So, you know, maybe, maybe we don't cut. I think, um, I, I feel like this, this is still a dovish fed that's inclined to cut. And I think, you know, they can take, they definitely, I mean, Jay Powell also can feel as his term winds down that, Hey, I oversaw this huge spike in inflation, but then I got it back down to sub three, maybe even if we're optimistic below two and a half percent, which he could just round down to two and declare victory. So I imagine, you know, there, there is going to be some good cheer. I don't know again, if this is going to impact, you know, the race for fed chair, which is based on things, you know, I don't think any of us really understand because there's just a lot of, you know, drama around that, that has been produced. Um, so we'll see [00:30:17] Jonathan Levine: how that goes. Yeah. Well, I've got to start winding us down here, but I have, have to say, you know, this has been in some ways, uh, an encouraging number caveat filled, but I think you have to say, uh, in encouraging it's a bit of a cliffhanger because I think as Greg correctly says, it's really going to depend what we get in the December numbers, both for this and the labor market. But what we know today, uh, and can feel kind of decent about heading into the holidays, is that, uh, CPI year on year printed at 2.7%, your core prints at 2.6%. The market isn't going bananas. We've got the yield on the, uh, on the two year treasury note down just about, about four basis points, which is reflecting some of these lingering questions. Nobody's getting too excited, but. Hey, it's, uh, it's kind of a good news, uh, good news CPI day. I think, uh, I want to thank, uh, Greg Dacco for joining my colleague, Alison Schrager, Ms. Jonathan Levin. And we look forward to joining you for more of these in the new year.