Consumer price inflation picks up mildly – The Daily Tearsheet

Vital Statistics:

Stocks are flat this morning after the CPI came in more or less in line with expectations. Bonds and MBS are up small.

Inflation at the consumer level rose 0.2% MOM and 2.7% YOY, according to the BLS. Shelter rose 0.2% and was the main driver of the increase. The core rate, which excludes food and energy rose 0.3% MOM and 3.1% YOY. Medical care, airline fares, recreation, household furnishings and operations, and used cars and trucks drove the increase. While furniture could be related to tariffs, the rest of the items are not.

The Fed Funds futures moved little on the announcement, with the September futures still seeing a 80% chance for a 25 basis point cut. The Fed’s stance of waiting to see if tariffs cause a spike in inflation is becoming more and more untenable, especially with the job market data becoming much soggier.

The CPI comes from the Bureau of Labor Statistics, which lost its head after the huge downward revisions in job growth. The new nominee (E.J. Antoni) comes from the Heritage Foundation and has been critical of BLS’s methodologies. “There are better ways to collect, process, and disseminate data—that is the task for the next BLS commissioner, and only consistent delivery of accurate data in a timely manner will rebuild the trust that has been lost over the last several years,” Antoni recently posted on X. 

IMO the BLS data doesn’t take into account the new gig economy very well, and it really should dispense with the fiction that someone under the age of 65 who has been unemployed for 7 months is no longer in the labor force. Job searches take time – often more than 6 months – and that person is most definitely unemployed.

Small business optimism continues to rebound, with the index rising just over the 52 year historical average. We are seeing signs of labor softness here as well, with a decrease in the number of owners who said they had jobs they couldn’t fill. Sales continue to be weak, with a net 9% reporting that sales were lower over the past 3 months.

Fewer companies are raising prices, although a net 24% did increase prices last month. That said, inflation registered third as the single most important problem behind labor quality and taxes.

Overall, the economy is still trending sideways and a bit southward. Interest rates remain unchanged and are higher than expected, although prospects for cuts in the Fed’s policy rate in the next few months are very good. The small business sector is waiting for the rollout of the One Big Beautiful Bill provisions and the final shape of the tariffs. Uncertainty remains high.

Overall consumer sentiment is low compared to historical norms, though sharply divided along partisan lines. Since October 2024, the University of Michigan’s sentiment data for Democrat-leaning consumers has fallen from 91.6 to 41.0 (Table 34). For Republicans, the Index rose from 50.2 to 93.1. Opinions about government policy are similarly bifurcated, with Democrat falling from 146 to 12 while the Republican Index rose from 24 to 146. Small business sentiment remains moderate, although it ticked higher this month. This is not conducive for investment spending needed to improve our productivity and produce new goods and services.

Uncertainty is high and rising, with tariffs, inflation, and international conflict such as in Gaza all sources of doubt. The Uncertainty Index rose 8 points to its fifth highest reading ever, clouding decisions about hiring, pricing, investment in plant and equipment. The tension between President Trump’s goals, Democratic opposition, and undecided court cases adds to uncertainty and the level of discomfort in the economy. The next six months will hopefully offer clarity and resolutions to most of the issues that trouble consumers and policy makers, giving businesses greater certainty, confidence, and ability to invest.