Sorry I skipped the Control Panel on Sunday. I had cataract surgery on my left eye last Wednesday and the right eye tomorrow. I may skip next Sunday depending upon my eye strain.
Today’s news is inflation. The CPI is the index which is used to determine the inflation adjustments for TIPS and I-Bonds.
U.S. Bureau of Labor Statistics
Consumer Price Index Summary
Transmission of material in this release is embargoed until
8:30 a.m. (ET) Tuesday, May 12, 2026
CONSUMER PRICE INDEX - APRIL 2026
The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent on a seasonally adjusted basis in April,
after rising 0.9 percent in March, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all
items index increased 3.8 percent before seasonal adjustment.
The index for energy rose 3.8 percent in April, accounting for over forty percent of the monthly all items increase. The
shelter index also increased in April, rising 0.6 percent. The index for food increased 0.5 percent over the month as
the index for food at home rose 0.7 percent and the index for food away from home increased 0.2 percent.
The all items index rose 3.8 percent for the 12 months ending April, after rising 3.3 percent for the 12 months ending
March. The all items less food and energy index rose 2.8 percent over the year, following a 2.6 percent increase over
the 12 months ending March. The energy index increased 17.9 percent for the 12 months ending April… [end quote]
The so-called “core index” of inflation omits food and energy because they are volatile, even though these impact households every day. The energy index affects consumer goods in many ways, not least due to the high price of diesel for delivery trucks (over $6 per gallon in my town).
The Federal Reserve Banks of Cleveland and Atlanta both show warnings of excess inflation and are predicting rising inflation ahead.
With inflation continuing high, it’s not surprising that the Treasury yield curve is rising. Investors don’t want to be locked into today’s nominal yields if inflation will eat up the value of the long-term interest payments.
But it’s worth noting that even the 10 year TIPS yield is also rising. Since TIPS yields are inflation-adjusted, this shows that the bond market is anticipating that interest rates will rise for reasons in addition to the rising inflation rate. Rising yields depress the value of all existing bonds, even TIPS.
I just finished reading " The Price of Money: A Guide to the Past, Present, and Future of the Natural Rate of Interest," a book by several Bloomberg authors, published July 25, 2025.
The subject was the “natural rate,” the interest rate which neither stimulates nor slows the economy. Unlike the Federal Reserve, which focuses on r*, the short-term rate which the fed funds rate manipulates, the Bloomberg team focused on the 10 year Treasury rate, which is set by the bond market (plus Fed QE manipulation) and impacts important economic factors like the mortgage rate.
In the book “The Price of Money: A Guide to the Past, Present, and Future of the Natural Rate of Interest”, the authors argue that the “natural rate” for the 10-year Treasury historically settles at approximately 2% above the rate of inflation.
The Bloomberg team concluded that the natural rate of the 10 year Treasury bond will rise to 1.3% by 2035. To that would be added the rate of inflation plus any extra yield demanded for uncertainty.
The long-term natural rate for the 10YT is 2% but it has been suppressed by trade partners re-investing their surplus USDs into Treasuries as well as QE.
However, the book concludes that demographic, trade and political factors are changing. The era of easy money is ending.
The current 10YT yield is around 4.4%. If we add 4.4% + 1.3% = 5.7% the bond market would receive quite a shock within the next 10 years. Even if we stay with the historic natural yield of 2%, adding today’s inflation rate to the natural yield and the predicted rise is 2% + 3.8% + 1.3% = 7.1%.
OUCH!
The Treasury yield curve rose a little last week but these future speculations didn’t trouble the overall financial markets. The Chicago Fed’s National Financial Conditions Index (NFCI), which provides a comprehensive weekly update on U.S. financial conditions in money markets, debt and equity markets, and the traditional and “shadow” banking systems, showed that financial conditions continue to loosen.
The stock market indexes continued to soar on the wave of borrowed money. The Fear & Greed index was in Greed. The CAPE ratio rose above 42. (Check out the chart linked below.)
The trade was strongly risk-on as stocks rose while the 10 YT price fell. Junk bond prices stabilized. Junk bond spreads widened which usually happens when investors fear defaults.
Gold, silver, oil, natgas and USD stabilized in their channels. Bitcoin is beginning to rise after its long drop but who knows how long that will last. This is short-term. The price of oil shot up beginning in January 2026.
Consumers are borrowing more to cover increasing costs but delinquency rates aren’t rising yet.
https://www.nytimes.com/2026/05/10/business/consumers-credit-inflation-costs.html
The markets are ignoring the war on Iran and the rise in inflation and oil prices. The stock market is driven by the AI spending mania.
The METAR for next week is sunny.
Wendy