CAMS View from the Corner
February 18, 2025
On a personal note, I continue to be amazed but certainly not surprised at general reporting of price inflation over recent years, including recent days.
Underlining this, with the updated price inflation data last Wednesday, one well-known Wall Street-oriented outlet chimed in with a chorus of other various outlets that price inflation has begun to increase again.
In a moment of involuntary self-talk, which we all may experience from time to time, I heard myself ask aloud, “When did it ever stop?”
We need to emphasize there is nothing new here. Simply, we have had a long, ongoing price inflation issue that has maintained its upward trajectory regardless of X narrative(s) to the contrary.
Below we offer a view dating back to last summer season, 2024, to current day in order to offer some perspective.
Above is the rarely shown, actual Consumer Price Index itself. This is the index representing the basket of consumer goods and services. This is not adjusted to reflect percentage changes but rather focuses on the actual index behavior.
The point is to simply show how the index has behaved in recent months and to underline how nothing has changed in the price inflation landscape, using the above CPI index as the visual tool to offer perspective.
In addition to this, we offer the index rather than percentage changes to push back against selected language seemingly designed to build favorable price inflation narratives that can be inaccurate in their tone. This approach toward narrative design has been in play nearly as long as we have had this ongoing price inflation issue.
Specifically, let’s say CPI has an arbitrary 4% increase in its index compared to a year ago. Then CPI, over the following few months, reflects an increase of 3.5% in its index compared to a year ago.
The fact is the CPI Index, in this arbitrary scenario, continued to increase as is depicted in our above chart but often is reported as though prices are retracting.
This is incorrect, hence our offering of how selected language can support X narrative when the narrative itself is inaccurate and false in its tone, if not conclusions.
CPI increasing at a 4% growth rate to then reflect a 3.5% growth rate only means the growth rate at which prices have continued to increase has pulled back a bit. Reality offers prices have continued to increase, albeit at a 3.5% growth rate rather than at the 4% rate.
Back to our current-day reality, the above chart of the index itself visually depicts how prices have continued to rise at an uncomfortable growth trajectory without pause.
What about the percentage change?
Above is a 10-year view of the CPI on a year/year percentage change basis. This decade view offers a larger perspective of the growth rate and its changes as time has unfolded.
Our red downtrend arrow depicts the notable drop in the growth rate of CPI from its peak down to the cessation of the downtrend, circa June 2023. Our red horizontal arrow then highlights how this growth rate has been steadfast in the general 3% area since late spring of 2023.
Just prior to our red circle, we saw a dip in the growth rate for a couple of months, but that ended quickly.
Our red circle highlights this growth rate has been gradually increasing again to include the most recent release from last Wednesday. Yet again, we are experiencing a 3% year/year increase in the growth rate for CPI. This was supposed to be at or very near the Fed’s 2% target by now, according to X narratives, to include the Fed itself.
Importantly, our circle denotes the increasing trend in the CPI growth rate dating back to the late summer of 2024. The point is nothing new is occurring here.
That is, price inflation via the Index itself continues its steady climb while the growth rate in prices, since late summer, has continued to increase at a higher rate.
It is for this reason we consistently asked, “Why is the Fed cutting interest rates?” dating back to late summer of 2024. It was quite clear the price inflation issue had not been resolved and their 2% target rate had not been attained, regardless of which price inflation measure was chosen as a frame of reference.
The Fed
With the 1% reduction in their Fed Funds rate since September 2024, we have seen price inflation gradually increase in its growth rate while the index itself remains relentless in its upward march. If the cuts were meant to aid in the reduction of price inflation, clearly the plan did not work.
This was not lost on bond market participants as they proceeded to increase interest rates by a full percent as the Fed was cutting by a full percent. Bond market participants clearly did not like what the Fed was doing and revolted by selling off bonds, and in so doing, pushed interest rates higher.
For example, as the Fed cut their rate by 1%, we saw mortgage rates increase by 1%. Mortgage rates move in sympathy with the 10-Year Treasury Note, so as bond market participants were selling off these bonds, resulting in a higher 10-Year Treasury rate, mortgage rates increased as well.
Interestingly, as the Fed began to express the need to curtail their interest rate cutting plans in the previous couple of months, bond market participants turned toward bidding up bond prices a bit, resulting in approximately a 1/3% reduction in the 10-Year Treasury rate. In light of this, 15-year mortgage rates followed suit with a similar reduction.
The takeaway from the data shared above is price inflation is certainly not dead; the upward trajectory of the CPI Index has not changed its behavior and its percentage growth rate has been stuck in a range, at best, which in the previous several months has changed into an increasing growth rate again.
All told, as we stand currently, there is little room for the Fed to be cutting rates from here as our price inflation backdrop remains quite challenged.
As shared, nothing has changed in the price inflation landscape, so when you hear that “inflation is rising again,” you may want to join me in asking, when did it ever stop?
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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