US Strategy Weekly: Beware of Bias

Many of today’s news headlines regarding the June CPI release are surprising to us as well as disappointing. Bloomberg News ran the following headline: “Tariffs Finally Bite” and wrote “As overall prices rose 2.7% in June from a year earlier, appliances jumped the most in nearly five years, toys increased at the fastest pace since early 2021 while household furnishings and sports equipment climbed by the most since 2022.” However, the actual data from the Bureau of Labor Statistics shows that prices for appliances rose 0.84% YOY in June, up from negative 0.77% YOY in May. This is a big switch from negative pricing to positive pricing, but clearly not inflationary. Prices for toys rose 0.8% YOY versus 0.2% YOY in May. Household furnishings rose 1.7% YOY versus 0.6% YOY in May and sports equipment prices actually fell 0.5% YOY after falling 2.8% YOY in May. In short, the real data does not fit the headline.

To be statistically rigorous, our analysis uses not-seasonally-adjusted prices on a year-over-year basis. This methodology automatically adjusts for seasonality, reflects actual price changes, and is closest to the actual experience of consumers. Our analysis does not show a significant acceleration in pricing, moreover, it widely differs from the Bloomberg article. We assume the Bloomberg writer was referring to month-over-month seasonally adjusted pricing, because it made for a more dramatic headline, even if it is misleading.

Equally important, the categories mentioned in the article have a small weight in the CPI. The largest of the four mentioned is household furnishings (a category that includes appliances) and is 3.36% of the index. Toys have a 0.288 weighting and sports equipment is 0.219. In short, the impact of these segments is limited, and the lack of analysis is disingenuous.

However, Bloomberg News should not be singled out because Reuters was equally bad with a headline of “US consumer prices rise in June as tariff pass-through begins.” ‘The Wall Street Journal carried a headline noting “Inflation Picks Up to 2.7% as Tariffs Start to Seep Into Prices.” To its credit, The Wall Street Journal also wrote an article about the reliability of price data stating “To calculate the inflation rate, stats workers check stores and online retailers to see how prices are changing month to month. When that isn’t possible, they estimate.” “The BLS used different-cell imputation 35% of the time when estimating missing prices, up from 30% a month earlier and well above the level of around 10% that was typical before the staffing challenges began.”

Unfortunately, this article is also misleading. The composition and reliability of CPI and PPI data is something I understand relatively well after serving as a member of the Department of Labor’s Business Research Advisory Council (BRAC) for consumer and producer price indices from 1985 to 1990. This committee meets with the BLS program staff approximately two times a year to explore areas of concern or interest. At the time that I served on the committee, the BLS was upgrading its system from wholesale prices to producer prices and adding more technology to their methodology. It was also very clear that stats workers estimated many prices on a monthly basis, and estimates were closer to 30% to 40% of all items per month than the 10% mentioned above. There are thousands of items that are priced every month and not all of them have regular monthly pricing and many need to be estimated. There may be more estimates today due to staff cuts, but I found the staff at the BLS to be conscientious and knowledgeable about their work to be as rigorous as possible. Moreover, there is a regular updating of prior months which were originally estimated, which is why the BLS is constantly revising historical data. Overall, the system is probably better today than it was when I served on the Council since technology has advanced dramatically and makes the gathering of prices far easier and more accurate.

Here is what we found in the June CPI report. Headline CPI showed prices rose 2.7% YOY, up from 2.4% YOY in May. Core CPI rose 2.9% YOY, up from 2.8% YOY. Food & beverage prices rose to 2.9% YOY, up from 2.8% in May, and 2.2% YOY a year ago. Owners’ equivalent rent of residences was 4.2% YOY, unchanged from May, but down from 5.5% YOY a year ago. The broad energy sector showed prices fell 0.8% YOY, but household energy prices (a 3.32% weight) rose to 7.1% YOY and energy services jumped 7.6% YOY. In short, lower energy prices are not reaching households and this contributed significantly to the rise in the CPI. On the other hand, motor fuel and gasoline both fell 8.2% YOY in the month. See page 3.

The main components of the CPI do not show a resurgence in inflation; however, the deceleration seen in recent months appears to have stalled. Housing remains a major component of the CPI and while owners’ equivalent rent of residence continues to trend lower, other segments such as tenants’ and household insurance is up 4.85% YOY, fuels & utilities rose 6.7% YOY, water, sewer, and trash collection rose 5.4% YOY, household furnishings and operations rose 3.3% YOY. (This is a different category from household furnishings and operations is where prices increased.) Separately, motor vehicle insurance rose 6.1% YOY (but down from 7% in May) and motor vehicle maintenance and repair services were up 0.1% to 5.2% YOY. Our analysis of the CPI report showed that inflation was not in imported goods, or even in goods, it was in services such as insurance, repair services, and utilities. See page 4.

In our opinion, President Trump should refrain from making negative comments about Fed Chair Jerome Powell, however, the data partially explains his frustration. With headline inflation currently at 2.7% YOY and the effective fed funds rate at 4.33%, the real fed funds rate is currently at 1.625% and is above the long-term average of 1%. In other words, there is, and has been, room for the Fed to ease interest rates by at least 50 basis points this year. See page 5. Other developed countries have been lowering their rates for the last twelve months. Perhaps the Fed “expects” inflation to rise to 3.2% YOY or higher, but if so, this means the FOMC policy has not been data driven. Actual data shows tariffs have not been inflationary; in fact, as noted, recent inflation has been in services, not goods. Note that import and export prices for June will be reported later this week.

June’s Treasury report revealed a monthly surplus of $27 billion, the second surplus since the $258.4 billion reported in April 2025. However, June was helped by the fact that June 1, 2025 fell on a weekend, and as a result, June’s government payments of Social Security, Veteran’s benefits, etc. were paid at the end of May. Still, the big story in terms of fiscal deficits is that deficits have remained high over the last four years. Typically, deficit spending accelerates during a recession and a 12-month sum of deficits returns to 2% to 3% of GDP during the subsequent expansion. This did not take place during the Biden administration and deficit spending continued at a pace of 6% to 9% of GDP. This stimulus added significantly to federal debt and contributed to inflation during the 2021-2022 period. See page 6.

The other change that took place during the last two administrations was the expansion of debt issued in Treasury bills. At the end of 2016, only 9% of federal debt was funded by Treasury bills and short-term rates were 0.6%. Treasury bills rose to 22% of federal debt by June 2020 as the pandemic deepened, but rates were extremely low at 0.125%. However, by the end of the 2024 fiscal year (September), Treasury bills represented 18.75% of federal debt and Treasury bill rates were 4.52%. As a result, from the end of 2020 to the end of 2024, interest payments on federal debt rose 155% from $345.5 billion to $881.7 billion, or from 5.3% of total government outlays to 13.1% of total outlays. See page 7. This is a massive burden on both the federal deficit and the debt markets. As a businessman as well as President, Donald Trump wants to lower deficits as well as the interest payments on the debt.

Technical indicators remain positive. The 25-day up/down volume oscillator is at 1.61 this week, neutral and down from a recent one-day overbought reading of 3.15 on July 3. However, this one-day overbought reading followed and overbought reading for 9 of eleven days in May during which it reached a high of 5.10 on May 16. The 5.10 reading was the highest overbought reading since August 18, 2022 which appeared shortly after the market rebounded from its June 16, 2022 low. This was very positive performance, confirms that strong demand is driving prices higher, and is a characteristic of a bull market cycle. We remain bullish for the second half of the year.

Gail Dudack

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