Siebert Blog

Inflation’s Disguises: When Falling Prices Stop Helping

Written by Mark Malek | March 13, 2025

Goods deflation helped keep inflation in check—but that’s changing. Here’s why your next car, outfit, or prescription could cost more.

 

KEY TAKEAWAYS

  • CPI came in lower than expected at 2.8%, but inflation is still lurking.
  • Services inflation is slowly cooling, but goods prices are reversing course.
  • Tariffs on steel, aluminum, and Chinese imports will drive auto prices higher.
  • PPI (wholesale prices) will show inflation before CPI does—watch it closely.
  • The Fed may not be able to cut rates as fast as the market expects.

 

MY HOT TAKES

  • The market is celebrating a CPI print that doesn’t reflect what’s coming next.
  • Goods inflation is back, and tariffs are about to make things worse.
  • If you think inflation is "solved," you’re looking at the wrong numbers.
  • The Fed is “data dependent,” but they haven’t seen the full data yet.
  • Inflation isn’t done. It’s just waiting to show up in consumer prices.
  • You can quote: "If tariffs stick, you can count on them finding their way into your wallets through consumer inflation."

 

Seek and ye shall find. OK, so we’re all still concerned about inflation. Some of us for the right reason and others for the wrong ones. We should all be unhappy about laying out more at the register. Lower interest rates are mostly better for us. And that brings us to our obsession with the Fed and its rate-cutting plans. Yes, the data dependent Fed, which is poised to re-act the second it sees numbers that show inflation is gone. Or, of course, if the economy tanks. We’d prefer the former, thank you.

 

The question is, when is inflation going to come down meaningfully? Will it get back to 2%-ish, or will it remain here, right around its long-term average (I wrote about this, in-depth, a few posts ago)? Left alone for long enough, the answer is probably yes, it will eventually slim back down to the Fed’s made-up 2% target. Notice the “left alone” in that last sentence? It was intentionally placed by the author (Me 😉).

 

Left alone, as if to imply no pandemic-led global lockdowns to gum up supply chains, or… wait for it… wait for it… trade wars. I know that inflationary trade wars and tariffs are old news by now, but just because they are out of the primary news cycle, it doesn’t mean that their effects have faded away. If tariffs stick, you can count on them finding their way into your wallets through consumer inflation.

 

Yesterday, we got the monthly Consumer Price Index / CPI from the Bureau of Labor Statistics, and the numbers came in slightly cooler than expected with the headline number coming in at 2.8%. At first glance, you may feel like this better-than-expected print was a good thing, maybe even clearing the path for more and earlier Fed rate cuts. You may even think that this is a sign that all this tariff-talk won’t affect inflation after all. The market certainly acted like it yesterday. But, in all fairness to the market, we will give it a pass after days of circus-like volatility; any glimpse of positive news is good for calming the nerves. 

 

Now that that is out of the way, we owe it to ourselves to have a closer look at yesterday’s numbers. Let’s start with the old themes. Sticky services inflation, driven by healthcare services and housing / shelter services. Well, those inflated and dis-inflated respectively. Shelter has been disinflating, but very, very slowly. Now, I am sure that you have noticed that services inflation, in general, has been the main focus of all inflation discussions since at least mid-2022. That being the case, some may have looked at yesterday’s Core Services CPI, and seeing it disinflate from 4.308% to 4.112%, thought “good news, we are making progress.” And we ARE making progress. However, we need to look at goods inflation as well in order to get a better picture of what is actually going on.

 

Because we have been so obsessed with services inflation for some time, many might have missed the fact that goods have actually been deflating, meaning that prices of goods are less expensive than they were a year ago. Because they were deflating, they have had a negative effect on the overall inflation figures. Negative in this case is positive for inflation. You can see that clearly by the following chart which shows the impact that goods deflation actually had a disinflationary impact on overall inflation. But you should also note that goods have been inflating over the past several months. Notice the rust-colored bars on the bottom right getting smaller and trending towards 0% and positive.

Now, let’s have a look at what might be causing goods prices to inflate. Check out the next chart, then follow me to an explanation and the close.


 

This chart (one of my favs from Bloomberg, ECAN <GO>) shows us the sub-aggregates of goods. On it, you will note that the lime-green bars, which are “transportation commodities”  have, for the most part, contributed to goods deflation over the past few years. Bringing this into the world of reality, this category is principally used and new car prices (the decline is mainly driven by new car prices declining). Ok, now stop and think about this for a moment. What might happen to car prices going forward. Will they likely continue to decline, or will they go up?

 

Well, now that aluminum and steel are being tariffed, we can count on those cost pressures to show up in prices. Additionally, the now in-force 20% tariffs on Chinese imports will also impact auto parts and subassemblies, which will also put upward price pressure on new vehicles–of course, unless the vehicle companies decide to eat the increases in costs–which I am pretty sure that they won’t. The bottom line is that at some point, inflationary pressure caused by the current tariffs will lessen the positive effects that vehicle deflation has had on the overall inflation figure. I know that last sentence was a mouthful–re-read if you need to, we can wait… it’s important. Ready? Let’s continue.

 

Do me a favor, squint if you have to, but have a look at that last chart and notice how all those other small bars have had very little positive or negative effect on the overall goods inflation figures. That is what we like to see–that’s low inflation. HOWEVER, if you notice what those bars represent, you might grow a bit concerned. Two of those notable bars are Apparel and Medical Care commodities. Most, if not all apparel is manufactured overseas, and quite a bit of the latter also originates from abroad. That means that tariffs will impact those as well.

 

That is not good news, if we are concerned about inflation and the Fed’s next moves. Now, those tariffs, many of which have only begun in the past week or so, take time to flow through the system, and in fact, many domestic producers and retailers have sped up overseas orders to stockpile inventory and avoid the expected tariffs. That won’t fix the problem, but it will certainly delay it. Lastly, it is important to distinguish between prices to consumers and wholesale prices. CPI represents what you and I pay for things. Wholesale prices are tracked by this morning’s Producer Price Index / PPI. It is in THIS number that we will first see the effect of tariffs and trades disputes. We consumers will only witness those increases once the retailers raise their prices to cover their under-pressure margins. They will come, trust me. 

 

YESTERDAY’S MARKETS

 

The bears got a break yesterday as a slightly cooler inflation number calmed nerves as equity indexes closed mostly in the green. Bond yields inched higher as risk money moved over to the dip buying operation in equities, which was led by the beaten-down tech darlings of last year.

 

 

NEXT UP

  • Producer Price Index / PPI (February) may have disinflated to 3.3% from 3.5%. Pay attention to this. It may be a sleeper but don’t sleep on the importance of this leading inflation indicator. Remember, producers are the first to realize inflation. 🧐
  • Initial Jobless Claims (March 8th) Is expected to come in at 225k, slightly higher than last week’s 221k claims.
  • Notable earnings releases today: Williams Sonoma, Dollar General, DocuSign, Ulta Beauty, and Crown Castle.

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