What the Headlines Are Missing About Inflation

Nasdaq’s Michael Normyle joins IBKR’s Jeff Praissman to break down what the headline inflation numbers may be missing, from energy prices and tariffs to housing, wages and the AI investment boom. They discuss what’s driving inflation today, the resilience of the consumer and why separating AI-driven growth from the broader economy could offer a clearer picture of what comes next.

Summary – IBKR Podcasts Ep. 431

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman

Hi, everyone. This is Jeff Praissman with Interactive Brokers. It’s my pleasure to welcome back to the IBKR Podcast Studio, Nasdaq’s Michael Normyle. Hey, Michael, how are you? 

Michael Normyle

Doing well, thanks. Glad to be back. 

Jeff Praissman

Love having you come in here for our monthly discussions on everything economy, I would say, right? 

Michael Normyle

Oh yeah. 

Jeff Praissman

And even before we get started, for our listeners, you can find a lot more from Michael Normyle and Nasdaq on our website, ibkr.com. Click on Education. You can find webinars, podcasts, articles, as well as if you go to nasdaq.com, and especially if you click under Insights, that’s where all their news and education lives. 

Michael Normyle

And the Economic Institute site as well. I’ll promote that too. 

Jeff Praissman

Yeah, absolutely. So Michael, obviously something that’s a hot topic forever, right? It seems. But when people hear inflation, they often think of it as one big story. But what’s actually driving inflation right now, and how different is that picture from, say, a year ago? 

Michael Normyle: Yeah. And so to your point, right now inflation is kind of multiple stories all at once. So to set the baseline, headline CPI inflation, and I’m using CPI here just ’cause we have an extra month of data for that right now, it’s 3.4% year over year as of August. Core CPI inflation, which excludes food and energy because those are especially volatile categories, it’s 2.4% year over year growth right now. 

And so the Fed’s goal is for headline inflation to be 2%. So it’s at 3.4%, the goal is 2%. And so there’s a few reasons why inflation is above that 2% target right now. The first is we’ve seen goods prices rise a little bit in the last year after tariffs were announced, and then, of course, there’s the energy supply shock we’ve seen from the Iran conflict. And also the AI build-out has boosted demand for data center components, but it’s also added to software costs. And so altogether, these factors are adding about one percentage point to core inflation at the moment. A year ago, this contribution was much smaller because obviously the Iran conflict hadn’t started and the AI build-out was also ramping up at that point. So if you go back to April 2025, headline inflation was 2.3%, and that’s the closest it’s been to falling below the Fed’s 2% target since February of 2021, when it was 1.7%. So we’re over five years now above that 2% target, and there’s a few reasons why, like I just mentioned. 

Jeff Praissman

And you did mention several different items. And how do economists separate the inflation from the consumer demand side that’s being driven by energy prices, tariffs, and other external factors? Like, how do you guys break it down? 

Michael Normyle

Yeah, I think, in general, it’s mostly just context. So it’s obvious in the case of energy prices right now that it’s supply-driven because there’s been disruptions through the Strait of Hormuz, which has negatively impacted oil supply, ’cause about 20% of global oil supply had typically gone through the Strait of Hormuz. That’s not the case currently. And even with all the different kind of workarounds with pipelines and things like that, we haven’t been able to fully replace that 20% of oil supply. And then on the flip side, with the AI build-out, demand for RAM, for example, is so strong that prices of Korean RAM exports, they’re up 400% year over year in August. 

So most of the time it is really context-driven. But the San Francisco Fed actually does have a statistical approach with its supply and demand-driven PCE inflation measure. So to quote them, “Demand-driven categories are identified as those where an unexpected change in price moves in the same direction as the change in quantity in a different month.” 

So prices rising as quantity purchased rises. Supply-driven categories are identified as those where unexpected changes in price and quantity move in opposite directions. So there’s a drop in supply, but a rise in price essentially, right? So there’s more to it than that, but this shows that headline PCE inflation, it’s 1.5 percentage points demand, 1.2 percentage points supply, and one percentage point actually falls into this ambiguous category. Back in April 2025, that low point that I cited earlier, it was 1.3 percentage points demand-driven, so that’s down from 1.5 now. 0.7 percentage points supply-driven, down from 1.2 now, and 0.3 ambiguous, down from one. So all categories have increased, but supply-driven has increased more than demand-driven. 

Jeff Praissman

And in the news, we hear a lot about wages, housing, and supercore inflation. Wages and housing are kind of obvious, but could you break down why those areas matter so much when trying to understand where inflation may be headed? 

Michael Normyle

Yeah. So as a reminder, core inflation, that’s headline excluding food and energy. Supercore is core services excluding housing, and that’s largely wage-driven. And so housing, it’s a big chunk of inflation because it’s 36% of that headline number by weight. Supercore is another 25% of inflation. So combined, we’re talking about 60% of inflation is determined by housing and supercore, and so that’s obviously why they matter so much. And the kind of interesting thing is right now, these categories aren’t really sources of inflation pressure. They’re currently contributing 1.8 percentage points to that 3.4% headline CPI number that I mentioned for August. 

But going back to April 2025, that low point that I’ve mentioned a couple times, they were 2.2 percentage points out of 2.3% headline inflation. So back in April when we were at that low point, almost all of it was core services and housing. And now we’ve seen inflation rise, but the contribution for core services and housing has actually been a drag. 

And so that’s for a couple reasons. First, the labor market has been softening over the last few years, so that means that wage pressures have slowed with it. And if you look at wages and salaries for private workers, and you use the employment cost index, which is the Fed’s preferred measure of wages, it slowed to 3.1% in Q2 of 2026 from 5.6% in Q2 of 2022. And then now, obviously, anyone following the news or interested in buying a house, you’ve seen that mortgage rates are a lot higher than they used to be a few years ago. That slowed demand for housing, and that’s turned into much lower home price growth. And for rentals, we saw a rising supply of apartments actually a few years ago that helped dampen rental inflation in recent years. So if you look at Zillow’s observed rent index inflation, that’s actually been relatively flat over the last couple years. So that suggests that market rents aren’t really a material source of inflation pressure either. So when you’re looking at wages or housing costs, even though they’re 60% of inflation, they’re not really a source of inflation right now. 

Jeff Praissman

Bottom line is there’s no shortage of data, right, Michael? Like, there is, I don’t want to say unlimited data, but there is lots of data coming in from several different areas. But when the Fed’s looking at the economy today, what’s the hardest part of their job? Is it figuring out whether inflation remains a risk or whether growth is starting to slow? 

Michael Normyle

Yeah, I think they’re fortunate on the growth front, where it’s pretty clear that the economy is doing well overall, and inflation is clearly the biggest challenge for the Fed. So like I said earlier, inflation’s been above the Fed’s 2% target since February 2021. We have a relatively new Fed chair in Kevin Warsh, and he’s made it clear that the Fed intends to get inflation back to that 2% target. The hard part, though, is balancing reining in that inflation with the potential risks to the economy that come with that. So the Fed funds rate, it impacts the economy through the demand channel, meaning that it’s not a good tool for addressing supply shocks. And so if you go back to the September Fed press conference, one of the first questions that Chair Warsh got after the Fed decided to hike rates was why? Because a Fed rate hike’s not gonna reopen the Strait of Hormuz, right? 

So the challenge there is really balancing this. So I think the good news, at least from my perspective, is the Fed projections show that they’re only seeing one more rate hike. And so I don’t think that’s really going to do a ton to address these three inflation shocks. For one, any kind of inflation that we’ve seen related to tariffs, that’s already fading. As we already discussed, the oil shock, it’s really a supply shock. And then on the AI front, this sector has really proven less rate-sensitive than most. If you look at real private business investment in AI categories, it’s growing at a 20% year-over-year rate, and it has been for three quarters. Three years ago, it was growing at a 2% rate. But if you look at real business investment for every other category, it’s been negative for seven straight quarters. So to me, this says AI CapEx in general, it’s not rate-sensitive, and businesses that are rate-sensitive, they’re already showing that rates are restrictive. 

So without the inflation pressures coming from wages and housing and rates not doing too much to impact these recent drivers of inflation, I think a more significant rate hike cycle would be riskier. So one or two hikes, though, I don’t think it’s gonna do much to the economy. The positive is that it might help limit a little bit of pass-through inflation from higher energy costs to other goods because, if you think about it, oil, diesel, they’re portions of the prices of all goods because they need to be shipped to their destination. And so if this cools off demand a little bit, it might help with that, but not do too much damage to the overall economy. 

Jeff Praissman

And I want to circle back to the consumer because prior to the last question, you were kind of focusing on them. And it seems like despite even these higher interest rates and this persistent inflation, their spending has remained fairly resilient given the circumstances. What do you see in the data today? 

Michael Normyle

Yeah, the consumer’s definitely, for years really, they’ve proven much more resilient than I think anyone has expected. And there’s a few factors specifically this year that have helped. One, of course, is the bigger-than-usual tax refunds that people saw this year. So because of the One Big Beautiful Bill Act, tax refunds were about 15% bigger this year than last year. 

And then until the last few months, we’ve been seeing wage growth has consistently outpaced inflation for the last several years. So that means positive real wage growth, and that helps people continue to grow their spending. On top of that, we’ve had a strong stock market in recent years. The Nasdaq 100 just hit a record high. It’s up about 20% this year, and so that contributes to a wealth effect where paper gains make people feel comfortable to spend a little bit more. So there’s a lot of factors that have helped consumers keep spending despite rising inflation. Now, there are a couple signs that the consumer could start to slow down a little bit here. 

Not necessarily that spending growth would go negative, but not grow as quickly. So research from Oxford Economics shows that the added costs of higher gasoline prices this year is about to surpass the additional size of tax refunds that people got. So that extra 15% in tax refunds is about to be fully eclipsed by the extra money that they’re spending on gasoline because of those higher gas prices this year. And then at the same time, you’ve got the savings rate down to 3%. That’s near one of the lowest rates in history, so consumers might be saving less to support spending right now. 

Jeff Praissman: And that leads me perfectly to my next question, ’cause while we seem to always be talking about oil prices, it does kind of ebb and flow a little bit as far as where in the conversation it goes. But it seems like they’ve moved to the top again with the recent price increases and, obviously, the situation over in the Middle East. 

So how much should investors and consumers be paying attention to energy prices and thinking about inflation and the broader economy? 

Michael Normyle

Yeah, I think under normal circumstances, we generally don’t have to pay too much attention to energy prices for what they mean for inflation and the economy. But lately, of course, it is a different scenario because we’ve got oil prices up over 50% since the start of the Iran conflict, and they’ve been pretty volatile during this period too. It’s not just that they’re higher and have stayed at this higher level. They’ve been going up and down as there’s been every single news item each day. So with no sign that there’s a near-term resolution, this is definitely something to continue to watch for both investors and consumers. 

And from the consumer perspective, higher energy prices likely mean lower spending elsewhere because you only have so much money to spend, and energy is really an essential, so that means you need to cut back elsewhere. So as long as this conflict lasts, we might need to watch that, especially now that those tax refunds have been spent. And then with how quickly things have changed, the Iran conflict, though, the caveat really is it could end tomorrow for all I know. So I guess we’ll see with that. But I think it is worth noting that the longer the conflict goes on, the longer businesses and countries have to adapt and adjust their energy supply chains, which will, over time, help mitigate the impact and eventually take some price pressure off of prices. 

Jeff Praissman

And Michael, as we head toward the final quarter of the calendar year, what economic reports or data points are at the top of your watch list and why? 

Michael Normyle

Yeah, of course, inflation and jobs are two key factors to watch as baselines for the economy, but also guides to what the Fed is going to do because they’re directly related to the dual mandate of price stability and full employment. But also, I mentioned this earlier, I do want to keep an eye on what’s going on with real business investment split along the AI and non-AI categories to see how those non-AI businesses are holding up since the strength of that AI investment cycle is distorting the headline number. So I think if we start to see a rebound in those non-AI categories, that would certainly be comforting that the economy is proving extremely resilient. And if we see it weaken even further, then it’s a sign that rates were restrictive and they’re getting more restrictive. 

Jeff Praissman

Michael, I would say when we are sitting here six months from now, because I’m lucky enough to have you come in here every month, what do you think we’ll understand much better about the economy that isn’t exactly clear today? 

Michael Normyle

Yeah, I think definitely a better understanding of these inflation trends, the underlying ones, how these three different forces that I’ve been talking about are playing out. Any remaining effect from tariffs will probably be fully resolved at that point. Oil prices could certainly be lower, but that’s not guaranteed. And then I think, of course, we’ll have a better understanding of the AI investment cycle and how supply will potentially adjust to meet the demand there. 

Jeff Praissman

And final question, for our listeners trying to cut through all the headlines, all the data, ’cause as we talked about, there’s a lot of it. If you could pick one, and I know that’s hard, what’s the one economic indicator you think deserves more attention than it’s getting right now? 

Michael Normyle

Yeah, I mean, I really do think that now and possibly for the next couple years here, we might need to try to look at economic data with the AI-driven elements stripped out from it to get a sense of how the underlying economy is doing overall. So this is relatively easy to do with that real business investment data that I spoke of. But I think as much as you can do that with any kind of data series, that will certainly be worthwhile to kind of see how this one secular trend is behaving, and then how the remainder of the economy is holding up. 

Jeff Praissman

Michael, as always, this has been fantastic. For our listeners, you can find more from Michael Normyle at nasdaq.com, as well as on our website, interactivebrokers.com. Until next month, Michael, thanks for coming by. 

Michael Normyle

Thanks.