The filtering methodology is rigorous but the question it answers is narrower than the question most investors are asking right now.
Stripping out OER, healthcare, and transportation removes the three categories where inflation is accelerating fastest. OER is a third of CPI. Transportation captures the Hormuz energy pass-through. Healthcare captures the insurance premium increases driving consumer distress. The remaining core services measure probaly does reflect stable underlying price pressure. But stable inflation in the components you kept and accelerating inflation in the components you removed produces a headline number that consumers and the Fed both have to respond to regardless of whats driving it.
The AI deflation thesis is the longer-term argument worth engaging with separately. If white-collar automation genuinley compresses wages over the next 3-5 years that is structurally deflationary. But the timing mismatch matters. Hormuz-driven energy inflation is hitting the economy now. AI-driven wage deflation is a 2028-2030 phenomenon at the earliest. The Fed has to set policy for the inflation thats arriving this quarter, not the deflation that might arrive in three years.
The honest synthesis is probaly that underlying inflation is stable AND headline inflation is accelerating AND both things are true simultaneously because theyre measuring different layers of the same economy. The question for positioning is which layer the Fed responds to, and historically the answer is headline.
The timing mismatch is the binding constraint. A filtered measure can describe underlying price formation accurately while being operationally useless, because the Fed reaction function runs on the unfiltered print. Dove or hawk, you trade the CPI the FOMC reads, not the one you wish they read.
This is from a non economist, as you can plainly see. I was trying to understand the complexities of inflation and learned that the sticky price index indicated a rise of 4.8% in the last report? I assume that is not what is optimal when considering longer term inflation implications? And to give this latest inflation report a shrug seems to discount what lies ahead for food prices, since farmers are paying 2x 3x for fertilizer and double for diesel. The cost of parts and anything made with energy are both increasing, but those prices have not laded on the dinner table yet. Just asking. Also,commodity prices can rise and fall, but I have never seen a box of Cheerios get larger for the same price. Thanks for your in depth look at inflation.
Your fertilizer instinct is the right one to follow. The Strait of Hormuz disruption took out roughly a third of global seaborne fertilizer trade, and that kind of shock prices in growing seasons, not weeks. Sticky CPI catches services like rent and insurance; the food channel arrives later, through yield rather than ticker. More on the lag here: https://thesynthesisai.substack.com/p/the-fertilizer-famine.
The filtering methodology is rigorous but the question it answers is narrower than the question most investors are asking right now.
Stripping out OER, healthcare, and transportation removes the three categories where inflation is accelerating fastest. OER is a third of CPI. Transportation captures the Hormuz energy pass-through. Healthcare captures the insurance premium increases driving consumer distress. The remaining core services measure probaly does reflect stable underlying price pressure. But stable inflation in the components you kept and accelerating inflation in the components you removed produces a headline number that consumers and the Fed both have to respond to regardless of whats driving it.
The AI deflation thesis is the longer-term argument worth engaging with separately. If white-collar automation genuinley compresses wages over the next 3-5 years that is structurally deflationary. But the timing mismatch matters. Hormuz-driven energy inflation is hitting the economy now. AI-driven wage deflation is a 2028-2030 phenomenon at the earliest. The Fed has to set policy for the inflation thats arriving this quarter, not the deflation that might arrive in three years.
The honest synthesis is probaly that underlying inflation is stable AND headline inflation is accelerating AND both things are true simultaneously because theyre measuring different layers of the same economy. The question for positioning is which layer the Fed responds to, and historically the answer is headline.
The timing mismatch is the binding constraint. A filtered measure can describe underlying price formation accurately while being operationally useless, because the Fed reaction function runs on the unfiltered print. Dove or hawk, you trade the CPI the FOMC reads, not the one you wish they read.
Largest year over year increase in Core PPI in five years.
Nothing to see? PPI feeding into CPI ?
I sense a political tone in much of the media writing on inflation. I often see the modifier “soaring” added.
Simple and Realistic must above two percent inflation now and possible later..The Control, Controlled Inflation is a Key, Crucial now complete.
This is from a non economist, as you can plainly see. I was trying to understand the complexities of inflation and learned that the sticky price index indicated a rise of 4.8% in the last report? I assume that is not what is optimal when considering longer term inflation implications? And to give this latest inflation report a shrug seems to discount what lies ahead for food prices, since farmers are paying 2x 3x for fertilizer and double for diesel. The cost of parts and anything made with energy are both increasing, but those prices have not laded on the dinner table yet. Just asking. Also,commodity prices can rise and fall, but I have never seen a box of Cheerios get larger for the same price. Thanks for your in depth look at inflation.
Your fertilizer instinct is the right one to follow. The Strait of Hormuz disruption took out roughly a third of global seaborne fertilizer trade, and that kind of shock prices in growing seasons, not weeks. Sticky CPI catches services like rent and insurance; the food channel arrives later, through yield rather than ticker. More on the lag here: https://thesynthesisai.substack.com/p/the-fertilizer-famine.
Thank you for the additional information. It can get a bit messy for novices such as me.
Good to keep your head straight during storms and this column reminds one of that