Prof G Markets

The Flaw in the CPI Narrative Recent Consumer Price Index reports suggest a cooling economy with a headline figure of 2.4% year-over-year. On the surface, this signals a victory for fiscal and monetary coordination. However, these figures rest on a shaky foundation. The Bureau of Labor Statistics faced data collection hurdles during the October shutdown, leading to an arbitrary assumption that prices remained flat. This statistical shortcut has compromised every subsequent report, creating a ripple effect of inaccuracy that obscures the true cost of living. The Consumer Expenditure Deflator While the public focuses on CPI, the Federal Reserve prioritizes the consumer expenditure deflator. This metric serves as the definitive guide for setting interest rate targets. Current projections indicate this measure will surge toward 3% as January data arrives. When we aggregate PPI and other inflationary inputs, the delta between reported numbers and economic reality becomes impossible to ignore. We are not approaching the 2% target; we are drifting further from it. Tariff Passthrough and Market Pressure External policy shifts are compounding internal data errors. Tariffs act as a direct tax on consumption, and the transmission mechanism is remarkably efficient. Data shows a 96% passthrough rate to the end consumer. Manufacturers and retailers are not absorbing these costs; they are protecting margins by offloading the burden. This creates a persistent inflationary floor that contradicts the "cooling" narrative promoted by the current administration. Persistent Price Volatility Market participants must prepare for a "hotter for longer" scenario. The combination of structural price increases from Tariffs and the correction of previous statistical undercounting suggests that inflation is accelerating rather than stabilizing. Real-world inflation sits closer to 3%, a level that mandates a restrictive stance from the Federal Reserve. The era of easy disinflation has ended.