Inflation is sticky - and tariffs aren't included yet

[WendyBG]

The latest PCE inflation index is higher than expected. This doesn’t include the effects of the new tariffs. Note that the 3-month annualized inflation rate is higher than the year-over-year rate, an indication that inflation is accelerating.

https://www.wsj.com/livecoverage/stock-market-today-dow-nasdaq-sp500-03-28-2025/card/personal-spending-fed-s-core-inflation-gauge-both-rose-last-month-NvwKlo9gRkYoUrRqZhFZ

Personal Spending and Fed’s Favored Core Inflation Gauge Both Rose Last Month

By Matt Grossman, The Wall Street Journal, 3/28/2025

,

The Cleveland Fed’s Inflation Nowcast shows both CPI and PCE inflation well above the FOMC’s target of 2%.

Inflation Nowcasting

Quarterly annualized percent change Quarter	CPI	Core CPI	PCE	Core PCE	Updated
2025:Q1	3.87	3.74	3.28	3.22	03/28

The Sticky Price Consumer Price Index less Food and Energy is 3.5%. The Sticky Price Consumer Price Index (CPI) is calculated from a subset of goods and services included in the CPI that change price relatively infrequently. Because these goods and services change price relatively infrequently, they are thought to incorporate expectations about future inflation to a greater degree than prices that change on a more frequent basis.

Sticky Price Consumer Price Index less Food and Energy

https://www.wsj.com/business/autos/what-trumps-auto-tariffs-mean-for-car-buyers-and-automakers-c496bb76?mod=finance_lead_pos3

What Trump’s 25% Auto Tariff Means for Car Buyers

Higher prices and fewer options coming if import duty on foreign-made cars persists

By Christopher Otts, Ryan Felton and Sean McLain, The Wall Street Journal, Updated March 28, 2025

President Trump rattled the auto industry Wednesday by saying he would slap 25% tariffs on all imported cars and trucks sold in the U.S., a far more aggressive measure than many in the sector had expected…

Nearly half of all vehicles sold in the U.S. are imported, a figure that equates to about seven million cars, trucks and SUVs purchased by consumers, according to industry data…

Car prices are almost certain to increase if the tariffs remain in place. Automakers and parts manufacturers can absorb some of the added costs but not all, and they are likely to pass some increases on to the consumer.

On average, vehicle prices could rise 11% to 12% to offset tariff duties, Morgan Stanley analysts wrote in a note released Thursday… [end quote]

A 25% tariff will have to be split between consumers (which will increase inflation) and manufacturers (which will decrease profits and harm the stock price).

Auto demand is elastic. If prices rise consumers will buy fewer cars. This will cause layoffs at the auto companies – a classic lead-in to recession.

Wendy

[Goofyhoofy]

@WendyBG

A 25% tariff will have to be split between consumers (which will increase inflation) and manufacturers (which will decrease profits and harm the stock price).
Auto demand is elastic

Expect used car prices to increase as they will be untariffed and will seem a bargain in comparison with new car pricing. (Use car prices have been returning to earth after the big run up during the pandemic.)

Therefore if you’re looking for a car, the time to get a new or used car is soon. The time to sell a newish or used car is about 6-12 months from now.

[btresist]

@WendyBG

The latest PCE inflation index is higher than expected.

Consumer spending was disappointing, rising less than expected and gas prices declined, so why is inflation rising faster than expected?

This is looking a lot like stagflation, rising inflation in a slowing economy. It is one likely consequence of tariffs, which has the twin effects of raising prices while slowing economic activity. The scary part is that this is occurring before the application of the big tariffs.

If the stagflation of the 1970s is returning we should all remember how the broader market performed during that decade.

This was the lost decade for stocks. About a 17% rise over 10 years. If this happens again we are not simply talking about the need to become more conservative with investments. We are talking about the need to downsize and reduce retirement quality of life.

[syke6]

@btresist

We are talking about the need to downsize and reduce retirement quality of life.

You can’t make America Great Again without sacrificing the future.

[mostlylong]

@WendyBG

Auto demand is elastic. If prices rise consumers will buy fewer cars. This will cause layoffs at the auto companies – a classic lead-in to recession.

Perhaps this is the concept of a plan for reducing inflation in the golden age: a recession that lowers inflation as people lose jobs and consumer demand lessens and then prices decline in response to lower demand.

Or, being sticky with my theory: mostly talk on tariffs (though I concede China tariffs might have more action: magnitude and duration).

[WendyBG]

@btresist I’m glad you posted this chart showing a decade of up-and-down stagnation in the stock market. One of my books on writing covered calls says that this is the ideal market for that type of option. @captainccs what do you think?

Of course, we can’t forget the nasty bear market of 1973-74 which coincided with the OPEC oil embargo.

Wendy