Inflation Hits a Curve

In this week’s Cents of Security Podcast, I spoke with Jose Torres, Senior Economist at Interactive Brokers, about the latest CPI report and its ripple effects across the economy.

Mary MacNamara

Hello everybody and welcome to the Interactive Brokers Cents of Security Podcast. Today we’re talking to Jose Torres, IB’s Senior Economist. Hi Jose. How are you?

Jose Torres

Hi, Mary. Doing great. Excited to be here once again in the sense of security weekly series.

Mary MacNamara

So tell us what happened in this inflation report today.

Jose Torres

The inflation report, I wrote on October 23rd that I thought that the bar was far too high at 3.1% for both the overall consumer price index as well as the core segment. Both were expected to come in at 3.1%. They actually came in at 3% because it came in below expectations, and there’s limited evidence that tariffs are.

Igniting significant cost pressures. Wall Street is rallying. Bond yields are falling, and stocks have reached fresh all-time highs, pretty much the October and December Federal Reserve meetings. Those are in the bag as far as 25 basis point cuts are concerned. However, the number of rate cuts in 2026.

That’s becoming more top of mind for market participants. Right now we’re expecting roughly three rate cuts in 2026.

Mary MacNamara

So why is core inflation considered more meaningful than headline in inflation?

Jose Torres

Headline inflation could be significantly altered sometimes by the volatile food and energy categories because sometimes due to surpluses or shortages of the particular materials, you could have surges and energy prices and food prices or significant declines that aren’t necessarily.

Representative of the inflation picture, but core excludes those two volatile categories, and it’s a better gauge of medium to long-term price pressure implications and the trajectory of inflation over the medium to long-term. So that’s why the fed, the 2% target is overall inflation, but sometimes, a spike in oil, for example, could.

Make it seem as if we’re way above the Fed’s target, when in reality as soon as those prices come back in, inflation will be more or less better behaved and closer perhaps to the Fed’s target, depending on the context Of course.

Mary MacNamara

So it sounds like these structural factors, especially tariffs they are driving the shift into a higher inflation regime, although everybody’s happily surprised that tariffs aren’t affecting it too much.

Jose Torres

Yeah. That’s been the theme since the beginning of the year. I’ve been telling folks not to worry too much about tariffs. We have the example from Trump 1.0 when you had tariffs implemented on the world’s second biggest economy, China, and you didn’t really see much inflation. In fact, similar to this cycle, hopefully you saw inflation top out at around 2.9%, 3% only for it to begin to submerge back to the 2% area.

Tars really concern core goods and that comprises roughly 20% of the CPI. I’ve been telling folks you, you can have an increase in core goods as long as the other areas aren’t too inflationary, you’re not going to have too much of a problem. And we saw that today we saw household furniture increase in price.

We saw apparel post to sharpest increase in a year. We saw recreational goods pick up. But Mary, they really didn’t move the needle much because housing shelter that is which includes owner’s equivalent rents, as well as hotel stays, it comprises roughly 45% of the CPI. Most of household budgets, they’re allocated to housing, to shelter, and that’s really what the weightings of the consumer price index are.

Designed to reflect is what are households, what share of household budgets are folks spending on shelter, food, transportation, medical care, et cetera. So you got this big deceleration in housing costs. August, you saw 0.4% growth rate. September, you’re down to 0.2, and that’s really why you had this big miss on CPI, the monthly and annualized figures for overall end core.

They all missed. By 0.1%. So, all the four important numbers. So, for example, overall, it was expected to come in at 0.4, 0.3. The annualized 3.1 came in at 3% for the core segment, expected to be up 0.3%, up 0.2. Similarly, annualized expected 3.13%. You had some deflation too. Used cars. That’s a big tariff sensitive area.

Used car prices went down, new automobiles. Those costs also, they didn’t go down, but they decelerate energy services. That’s heating and electricity. That off also offered some dis deflationary force. It was the 0.7% month over month decline in energy services. Natural gas related, that’s electricity and heating.

That helped bring the number down. Gasoline, however, was the top riser. It rose 4.1% month over month. And that’s another reason actually to be optimistic because gasoline prices recently have been cooperating. So what does that mean For October, November, and December, inflation reports, we have this favorable effect from.

Energy and gasoline costs are going to come down, so that actually pushed inflation higher in September. That’s going to move into a deflationary stance in October. Based on our real-time indicators here. So that’s something to be very excited about if you are a treasury bull or a stock market bull, because you’re going to get better inflation figures and then also the base effects.

So, October, November, and December last year, you’re coming off of some high numbers. So, because of those high comp. Last year, that made it a little easier to get some lighter numbers on an annualized basis. Going forward in October, November and December the theme really remains consistent. From the beginning of the year, we’re looking for a reaccelerating economy.

It’s what we’re seeing. We also got the Flash PMI report this morning for the US and for international areas as well, like the EU, Japan, and UK. And it was October is the second strongest month for economic growth all year so far. So, we’re seeing a reaccelerating economy. That’s part of the reason why inflations at 3% because.

Businesses have pricing power. The servicers, there’s a lot of demand. Folks are out there spending the lower and the middle-income cohorts. They’re really supported by a low unemployment rate and the high-income cohorts. They’re supported by the buoyant capital markets, stocks, crypto, treasuries, gold.

We really have this significant rally in markets, and that’s really supporting consumption all across the board.

Mary MacNamara

So it was important to get this report out also because we’re having a shutdown right now because of social security. Can you tell us about that?

Jose Torres

Absolutely Social Security. They have statutory deadlines as to when they need to publish the annualized, increase the cola, the cost-of-living adjustment. After today’s CPI report, it’s 2.8% for 2026, roughly 75 a million. 75 million Americans receive social security checks. So of course that is a significant impact.

So due to the special circumstances, the BLS decided to bring back some people just to prepare the CPI so that those numbers could be available to Social Security Administration so that they can, set the correct amounts and then deliver those payments in a timely manner.

Mary MacNamara

It seems that gas was up, and electricity was down. Is that true?

Jose Torres

Yeah. Gasoline is heavily influenced by crude oil, whereas electricity and heating, they’re much more influenced by natural gas trends. So oftentimes those two commodities, they move in different directions. And we saw that in September where gasoline was a tailwind for inflation, but electricity and heating offered deflationary winds.

Mary MacNamara

So Jose, what else do we have coming up?

Jose Torres

We have a big meeting between President Trump and Xi Jinping of China. That’s going to definitely affect investor sentiment as far as relations between Beijing and Washington are concerned. Those are the two top economies in the world. There’s an expectation, however that. There’s going to be some progress reported, but you really have longstanding issues between the two nations, and it’s going to be more of an extended standoff, albeit within that long episode, you’re going to have some areas, some.

Time spans where there will be a cooperation, but that can become tension after a few months or so because China’s goal is to be the number one economy in the world and to be the number one economy in the world. Then essentially there’s, that’s naturally going to conflict with the US’ goals. For that reason, there’s an expectation that the tension between the two nations will remain at least at a neutral level for the foreseeable future.

Mary MacNamara

Okay, Jose, that was excellent. Thank you so much for your insight as always.

Jose Torres

My pleasure, Mary. Looking forward to seeing you next weekend. Bye everyone.

Mary MacNamara

Bye.