Will this Prove to be the Launch Pad for Price Inflation?

CAMS View from the Corner

April 15, 2025

Last Thursday the Bureau of Labor Statistics (BLS) provided the monthly update of consumer price inflation via the Consumer Price Index (CPI) and its universe of subcomponents.

The data posted some interesting developments relative to observations we have been sharing on this topic over recent years, but especially in recent months. 

We let the data speak below as well as point to some behavioral changes.

Click For a Larger View:  https://fred.stlouisfed.org/graph/?g=1I4I4

Above is a decade view of the CPI presented as a percentage change on a year/year basis.  The current release posted a 2.4% increase compared to a year ago, which is a notable downshift from the previous month’s release of 2.8%.  As good as this one-month change is there is a larger behavioral story to observe.

Our red horizontal line denotes the 3% marker, which has been in play for a couple of years.  We consistently drew attention to the stubbornness of this 3% area during the two-year run depicted.

Along the path, we did see a drop to sub-3% only to witness a quick resurgence back to the 3% level.  The significance, at this juncture, is that it appears we are holding a solid 2% handle as a newfound range.

Our red arrow highlights the most recent data point and draws attention to the fact that this release posted the lowest year/year change since early 2021.  The lower low is certainly marginal, but more importantly, from an overall behavioral perspective, the data is carving out a significant behavioral change.

That is, rather than the stubborn 3% area acting as a solid floor from which it refused to penetrate through, it has gradually morphed into a ceiling.

This lingo is basic chart analysis when viewing price behavior.  In sum, to this time, we have a 3% ceiling in place while we are posting lower lows.  If this were a stock, for example, this would offer concerning behavior, as this is not language describing a necessary uptrend in order to produce a winning stock holding.

Said differently, we are seeing a notable shift in this pricing behavior which is offering the 2% range on a year/year basis is holding.

Click For a Larger View:  https://fred.stlouisfed.org/graph/?g=1I4Hu

Above is another angle of CPI whereby the more volatile food and energy components are taken out.  This is viewed as a “core” price inflation metric as it extracts the noisier food and energy in order to see what is happening under the surface, if you will, less those more volatile components.

We have often drawn attention to this metric as well.  This “under the surface” view has been pointing to an ongoing price inflation issue, which has also exceeded the CPI metric. 

This core measure has been stubbornly posting results well into the 3% range for a large chunk of 2024 and early 2025. 

Our red horizontal line denotes the 3% level which offers an easy visual of how stubborn this core measure has been as it has been consistently posting 3% plus year/year results.  Per our horizontal line, we see it has refused to even approach the 3% level, let alone penetrate it.

That is until last Thursday’s update, whereby our red arrow denotes the penetration down through the 3% level. 

Importantly, this core price inflation measure continues to remain well north of the overall CPI figure, so there is much progress yet to be made.  Penetrating the 3% floor is certainly worthy of attention.

Consensus Expectations offers none of this Matters

In case you have been on a deserted island, there is a tariff issue that, per consensus, guarantees an incoming spike in price inflation.  With this, per consensus, we can view the above, not as progress, but rather as a launch pad for the expected spiking price inflation to launch from.

In our previous edition, Capital vs. Labor, we offered this is anything but a certainty.

It all depends, as it always does for any business when incurring increased input costs, as to whether they will be able to pass the increased input costs (to include tariffs) on to their end consumers.  If so, what percentage?  100%, 50%, 10%, you get the point.

This is the continual challenge for businesses in pricing their goods and services.  What price point can they offer and continue to reasonably expect to maintain their market share, if not grow their market share, relative to competitors.

When increasing input costs enter the scene, regardless of the nature, the issue is the balance between profit margins and satisfied customers via the price point businesses place on their goods or services.

Sometimes X business realizes these costs must be pushed through as margins are already rock bottom.  With this, market share be damned, the price is going up commensurate with the increased input costs.

Other times, X business will realize they have quite satisfying margins and conclude there is room to eat some of the increased input costs by keeping the price the same, or close to, choosing to keep market share and perhaps having an eye toward increasing said share.

The point is this is not a slam dunk that X increased input costs, to include tariffs, equals a guaranteed X commensurate increase in the pricing of goods and services.

Don’t Forget, the Consumer Can Choose Otherwise

If we lather up in economics lingo, elastic demand offers price leads to a change in demand. 

Elastic demand informs us that consumers are sensitive to price.  If prices increase, when demand is elastic, then demand for goods and services wanes in light of the higher prices.   Conversely, inelastic demand offers little sensitivity to price changes - price goes down, price goes up, and demand stays pretty consistent.

If you take the above into your personal consumer life, you can appreciate this via your own habits.  A happenstance discretionary consumer item that you purchase can easily be rejected due to a price point you no longer find attractive.  Hence, you say no thank you and move on.  You are representing elastic demand in this example.

Conversely, to go to the extreme opposite for discussion purposes, in the middle of a cold winter, regardless of the price of say, natural gas, you will choose to stay warm and live.  Here is inelastic demand in action.

Through this, demand is less or more reliable, if you will, according to the products and industries under review.

To offer, as an across-the-board statement, that X input costs (to include tariffs) equal guaranteed across-the-board higher prices is pushing toward narrative. 

As we offered in our previous edition, if it offers anything certain, it is that corporate profit margins can be challenged more than a certainty that across-the-board price inflation will be spiking. 

Essentially, companies have to assess how elastic or inelastic the demand for their goods and services is and then figure out how much, or how little, profit margin impact they are willing to incur.  Of course, there is always competition to consider in this assessment as well. 

It does not boil down to such an easy narrative that X input cost increase equals a guaranteed X increase in the end price of goods and services, and hence, systemic price inflation.

Regardless of the above elastic or inelastic demand discussion, we can use the above shared BLS CPI data charts as a line in the sand from this point forward.  Will they prove to be the much expected launch pad as updates are released over the coming months?  This will be very interesting to monitor and observe.

Consensus seemingly guarantees this will be the case.  Deeper, non-emotional logic offers that we may want to be careful with the consensus guarantee.

There are several additional tributaries that could be delved into, when viewed through the lens of the consumer, that offer this expected spiking inflation is anything but a certainty. 

To keep this as succinct as possible, we thought it easiest to stay high-level to at least share a counter view of the broad consensus. 

In the larger background we continue to watch with diligence for signs of incoming recession.  We have offered many times throughout this price inflation era that history offers said eras often do not end without a recession entering the fray.  Progress on price inflation continues but this issue has not been resolved to date.

Regardless, time will tell her story.  We will use and watch the above charts as points in time to decipher if they prove to be launch pads or if their behaviors continue pretty much as they have been in recent months.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis