CPI inflation: a bit better

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Good morning. Donald Trump has done a fine job of calling attention to Ronald Reagan’s profound dislike of tariffs by denying its existence. Unhedged is just happy to see The Gipper back in the news. Email us with fond memories of the 1980s: [email protected]. 

Inflation

Friday’s CPI inflation report was good news. Inflation remains above the Fed’s 2 per cent target, but the trend in September was down:

Both durable goods (where there has been upward pressure from tariffs) and core services showed a declining trend:

But on both the goods and services sides of the ledger, lower inflation comes with an asterisk. For goods, the readings for new and used cars were very low and, as many commentators pointed out, if you exclude autos, the annualised rate of core goods inflation was more than 4 per cent. Omair Sharif of Inflation Insights provides the chart of core goods without autos: 

Similarly, if you exclude the low (and, notoriously, lagging) shelter component of services, “supercore” services inflation remains around 4 per cent (with high air fares providing a lot of upward pressure). Of course, low auto and shelter inflation matter a lot, and this month’s low overall reading is positive. The point is just that there are still lots of categories of inflation that are still running hot, and the volatility of a few large categories is a reminder not to put too much weight on any one month. 

Looking ahead, two trends to watch. Where tariffs matter the most, in categories such as apparel and furnishings, we don’t know if companies that are currently absorbing most of the tariff costs will ultimately decide to pass them on to consumers. That will matter a lot economically and politically. And we are still waiting for “supercore” services inflation to cool, which will be a key signal for the Fed that the way is fully clear for a series of rate cuts. 

European deregulation

Many European policymakers don’t like the term “deregulation”; they prefer “simplification”.

“Simplification must never be confused with deregulation: deregulation implies abandoning key policy objectives — most notably, in the EU’s case, green transition and social inclusion,” notes Marcello Messori of Bocconi University. “Simplification, by contrast, enhances regulatory efficiency”.

Stephen Schwarzman of Blackstone, by contrast, is happy to call it deregulation — and he is one of the group of economists and financiers who have turned more positive on Europe this year, citing hopes for regulatory accommodation. According to Jacob Kirkegaard of the Peterson Institute for International Economics, 

There is an acceptance across a widespread share of the political spectrum that the EU needs to course correct, and that fundamentally, regulation has become too cumbersome for economic growth. It doesn’t mean the EU is about to undergo some Margaret Thatcher-style deregulation revolution, but there is a clear political drive of trying to roll back some of the cumbersome types of regulation, particularly the reporting requirements 

The first portion of the EU’s “Omnibus package” has been passed, exempting small businesses from prior due diligence and sustainability reporting requirements. Omnibus II, currently being debated in the European parliament, is more of the same; it simplifies requirements for investment programs.

Enrico Letta of the Jacques Delors Institute and former prime minister of Italy, told Unhedged the Omnibus packages are “not enough, but show the goodwill of the European Commission”. They do not address a core form of European problem: the labyrinth of national regulatory regimes and the amplification of EU regulation at the national level (“gold plating”).

The more significant development, Letta believes, is the European Council and the European Commission deciding last Thursday to set 2028 as the final deadline for the single market integration strategy. With this, 

2028 can be the new 1992. 1992 was the turning point because it was the date when we completed the single market launch — a very symbolic moment because that was the starting point for the Euro 

Letta said one of the most important next steps will be integration of pensions funds and investment accounts, creating a single pool of European savings available for European investment. “We need to move,” he says. 

Kirkegaard also points to the recent EU-Indonesia free trade agreement, which came after nine years of talks between the two countries. The EU ultimately relaxed some of its demands for regulatory compliance to get the deal done. “The fact that there is now an EU-Indonesia FTA indicates that ultimately, the EU will adopt a pragmatic interpretation of these directives” he says.   

Judging by the performance of European stock indices, global investors are giving the continent a fresh look. If the deregulatory momentum subsides, that could change quickly. 

(Kim)

One good read 

Scott Bessent.