All METARs know that inflation erodes our purchasing power. Every shopper gasps at rising grocery and gas prices, not to mention health care, insurance and education.
But inflation has impacts on the bond market, the government and the Federal Reserve. CPI-U inflation is used to adjust the payments on TIPS, I-Bonds and Social Security.
Tweaking the inflation statistics is anathema to bondholders. I was disturbed when Federal Reserve Chair Kevin Warsh advocated for shifting focus toward trimmed mean and median inflation measures rather than relying primarily on traditional headline or core Consumer Price Index (CPI) numbers. Fortunately, CPI is calculated by the BLS, not the Fed, so Warsh can’t mess around with it himself.
Last week, the U.S. Bureau of Economic Analysis (BEA) implemented methodological updates and revisions to its calculation of the Personal Consumption Expenditures (PCE) price index. Surprise, surprise - the new revised calculation gives lower inflation!
Not Even the Massive Changes of Methodology Can Get PCE Inflation Back into the Bottle
by Wolf Richter • Wolf Street, Sep 30, 2026
What’s different today is that the BEA also included changes of its methodology for three subcategories of the PCE price index. The first two slashed the “core services” PCE price index; and the third slashed the “core goods” PCE price index:
- Portfolio management and investment advice services
- Legal services
- Computer software and accessories.
The year-over-year “core services” PCE price index was slashed by 34 basis points for July as a result of these methodological changes and other revisions, from an old increase for July of +3.69% year-over-year, to a new-and-improved increase for July of +3.35% year-over-year. And in August, based on this new methodology, the core services PCE price index also increased by +3.35%. Blue = old year-over-year inflation rates; red = new-and-improved year-over-year inflation rates:
Core services account for over 60% of consumer spending. They include housing, healthcare, travel, lodging, transportation services (airline fares, etc.), insurance of all kinds, auto repair and maintenance, communication (cellphone services, broadband, etc.), subscriptions, financial services, recreational activities, memberships, etc…[end quote]
Trump just opened the Pandora’s box of inflation
Posted on October 4, 2026 by Tipswatch
In his his interview last week with Time magazine, President Trump mentioned, in an off-hand way, that inflation could be the solution to the nation’s $40 trillion national debt. This is something a president should NEVER say.
You can read the full text of the interview here.
[snip]
Trump: We should be the lowest interest rate with the most prime country — we should be the lowest interest rate in the world. …
Q: Well, they’re concerned that the economy is too hot.
Trump: No, they’re concerned for inflation.
Q. Well, yeah, exactly.
Trump: Okay, and frankly, this is hurting our country more than inflation is hurting our country. More than inflation. You know, inflation. Certain levels of inflation will also pay off that debt very rapidly. Very rapidly…
It’s impossible to say exactly what Trump meant by this, but it is a dangerous statement, suggesting that the United States could “inflate away” $40 trillion in debt. … [end quote]
It’s easy to see the plan.
Higher inflation → investors demand higher yields → Fed buys Treasuries → Treasury yields suppressed → government continues borrowing relatively cheaply → inflation erodes the real value of existing debt.
This is classic Financial Repression. Holding nominal paper assets (like traditional cash or unhedged long-term bonds) becomes a structural transfer of wealth from savers to the sovereign borrower.
In a financial repression scenario, inflation-linked assets (TIPS and I-Bonds) and short-duration bond ladders serve as the main defensive moat, since real yields protect purchasing power directly against debt monetization.
The problem is that financial repression has always led to financial collapse of any country that tried it. The U.S. may rely on the dollar as international reserve currency but that will only last so long if we deliberately chip away at the soundness of our currency.
Bond investors, especially foreign bond investors, will demand higher interest rates to compensate for long-term uncertainty - a rising term premium.
The Cleveland Fed’s Inflation Nowcast shows inflation rising in 4Q26. If the CPI actually rises by 4% - well, that’s moving in the wrong direction.
AI Is Squeezing Out the Rest of the Stock Market
Expect stocks outside tech to struggle, earnings to expand more slowly and concern about credit risk to grow
By James Mackintosh, The Wall Street Journal, Oct. 2, 2026
…
Artificial intelligence is sucking in capital and squeezing the rest of the market, where stocks face higher interest rates and oil prices without a sexy technology story to sell…
September’s stock-price moves show how narrow the market has become. Almost 80% of stocks in the S&P were down, the average stock was off 5% and only two out of 11 sectors were up, led by tech. …
The result is that, outside AI, companies and consumers are being hit by a triple-whammy of higher rates, higher fuel prices and competition from AI firms for staff, equipment and capital…
Wall Street thinks the profit boom that helped stocks earlier this year is done, too. Analyst earnings forecasts for next year had risen solidly since February but have flatlined in the past few weeks… [end quote]
If earnings flatline with the CAPE over 41…watch out.
The stock indexes show the concentration of speculators in tech. The NAZ is at a record while the DJIA is dropping. The Fear & Greed Index is in Fear. But the SPX-based risk trade is risk-on.
Treasury bond yields have been rising. Have they topped? It’s hard to say. All the underlying problems are still there. Huge, rising deficits. Crowding by AI. Stubborn inflation. At least overall financial conditions are stable.
Weak companies are in trouble as junk bond interest rates are skyrocketing - the yield spread over Treasuries is 12%. The AI megascalers with massive cash flows from their non-AI business are not threatened but many weaker businesses may be driven closer to default.
USD is rising. Fuel prices dropped a little but the underlying problems are still there.
Economic activity in both the manufacturing and services sectors expanded in September, according to the nation’s supply executives in the latest ISM® Manufacturing PMI® Report.
The unemployment rate was stable even though relatively few jobs were created. The labor force is declining due to retirement and immigrant expulsions.
The METAR for next week is cloudy. I don’t see any storms on the horizon but the picture is unbalanced. It’s hard to say whether it will stabilize.
Wendy
https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/pmi/september/
https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/services/august/
