Well whaddya know, core inflation in the US was cooler than expected last month. Fancy that.
Underlying price growth across the world’s largest economy was 0.2% in December (0.239% unrounded), Donald Trump’s BLS said Tuesday.
Editorial innuendoes aside, that’s not low enough to be suspicious, but coming as it does on the heels of a very messy November release which most observers (which is to say everyone other than administration officials) viewed as completely suspect, the favorable print will nevertheless elicit some smirks.
The last release, you’re reminded, suggested core inflation averaged less than 0.1% MoM across October and November, months during which it wasn’t possible to tally a precise figure due to the pause in data collection caused by the government shutdown.
On a YoY basis, core inflation was unchanged in December at 2.6%.
The shelter inflation line, which was the subject of intense scrutiny for questionable assumptions the BLS made regarding placeholders for October’s missing housing figures, showed a 0.4% increase for December.
The headline food gauge printed a 0.7% increase, the quickest pace since 2022. Both the subindexes were likewise warm, although on a YoY basis, grocery price growth’s running “just” 2.4%. The energy gauge logged a modest 0.3% advance.
Running through the components of the core readout, most lines were pretty firm. Apparel, for example, showed a 0.6% MoM gain and transportation services 0.5%. And yet, the annual rate for both of those lines is quite cool. Used vehicle prices fell 1.1% from the prior month. Airfares rose more than 5% and the metric that tracks hotel stays posted a 3.5% advance.
Stripping out shelter and goods, core price growth was just 0.14% in December. Although “regular” core services (and at this point, I’m not even sure what these refined metrics capture) was the warmest in four months at 0.29%, core goods prices actually fell a bit MoM.
All in all, this was a reasonably favorable result for the Trump administration in terms of giving The White House and its surrogates an excuse to push for more rate cuts.
Of course, there are “other” ways to go about bringing down rates. Like forcing the GSEs to buy $200 billion in MBS. Or decreeing a 10% cap on credit card interest. Or — and I’m just spitballing here — indicting the head of the central bank.
The last time the GSE’s were forced to buy MBS was after they were placed into “conservatorship” prior to being “wound down” by their “conservators” but then not being “wound down” because literally no private bank can operate as cost effectively as they do in servicing mortgage debt. I’m sure this time they won’t end up taking on debt that they aren’t allowed to repay for over a decade because their “conservators” are actually trying to destroy them so that private banking can take over their business. Socialism, am I right?
Wouldn’t a 10% cap on credit card interest simply result in a lot of people becoming ineligible for a credit card?
That and a lot of other things. Like forcing people into the arms of payday lenders and pawn shops. I’m the last person to defend big banks burying people in credit card debt they can’t pay back because the rate’s so high it precludes ever making a dent in principal, but on the other hand at least borrowers are apprised of what they’re getting into if they just bother to read the terms.
You might not be able to get a credit card without a 700+ score or something like that. Certainly subprime holders would be out, probably many prime too. Young people would have a hard time establishing credit. And banks will have a harder time collecting balances after terminating credit.
There are, I think, better ways to protect people from excessive CC debt.
I have a fair number of BDCs in my income account, so I have a decent mental map of where business lending rates have been over the years. At the recent interest rate peak in 2023, they were lending at ~14%. Those were loans to profitable going concerns whose books were wide open to the lender. It has only really been in last quarter that, with tightening spreads and dropping short-term rates, new loans have dropped to around 10%. These are senior first-lien loans to profitable businesses looking to expand their operations (or whatever). Now compare that with Joe Nobody who, if he loses his job, will never be able to pay off his credit cards. There are no assets to foreclose on, and the only thing the lender knows about him is what can be gleaned from a credit score. You wouldn’t so much see “a lot of people” becoming ineligible; rather, virtually everyone would become ineligible. You’d practically need to invent a whole new form of consumer financing that involve novel forms of collateral. To the extent people can still obtain credit cards, credit limits would need to be slashed, likely by an order of magnitude.
Can you imagine what this would do to American retail spending? Part of what crushed domestic demand in China was the squashing of Ant Financial and it’s micro-lending platform (Jack Ma was right about banking regulators having a “pawn-shop mentality”: if every loan has to be backed by collateral, people without collateral won’t borrow). That wouldn’t even be a drop in the bucket compared to what would happen if you took away Americans’ credit cards.
I speculate that the shutdown may artificially depress shelter CPI for six months. BLS divides its shelter survey cohort into six “panels”, each is surveyed twice a year (panel 1 in Jan and Jul, panel 2 in Feb and Aug, etc). I am not positive how the panel data is weighted, but I suspect that each month’s shelter CPI is some weighted combination of the preceding six panel surveys – rather than just the single panel surveyed that month. That would be consistent with the lag between BLS shelter prices and market-based shelter prices. If so, then since the October panel was deemed to have zero inflation, that will contaminate CPI until May 2026. How much – don’t know, maybe half a point?
Hopefully someone who actually knows BLS methodology in detail will correct me.
I’ve done a bit more reading, and think CPI will be artificially depressed by the shelter component though 3Q26. That’s a lot of money taken from retirees, TIPS holders, anyone with contracts or pay indexed to CPI.
I cannot find any credible estimate of how much the BLS is understating CPI via the shelter distortions, so I made this one: (3.20/56 – 3.2)0.35 = 0.22 YOY. Using MOM, maybe 0.34 YOY. So maybe 20-40bp?
Oops, asterisk didn’t compute. ( 3.20 / 5 x 6 – 3.20 ) x 0.35 = 0.22