Inflation Slowing Sharply in January Is Good News for Trump: Economist

And joining us to discuss is Joseph Trevisani, economic and currency analyst at FX Street. Joseph, good afternoon. How are you doing this week? Good afternoon, Don. How are you? I'm doing pretty well. I'm just happy the weather is getting warmer. I didn't really like the cold of the past few weeks. But the consumer price growth slowed to a 2.4% on a year-over-year basis. We got the data today. Is this a significant improvement in your view, something consumers should be happy about? I think it is a significant improvement. It's certainly been going, CPI and inflation, going in the right direction for some time now. It's also a bit of a, shall we say, a discussion point for those who said that the tariff policy of the Trump administration would inevitably cause higher inflation. That has clearly not turned out to be the case. It is back to, the headline CPI is back to where it was right after the new tariff policies were first brooded about by President Trump. So who's paying for those tariffs? I mean, if you raise the rate, somebody has to pay for it. That's correct. And the companies and the importers are absorbing most of it. That's very clear, because otherwise we would have a much higher inflation. A large amount of our consumer goods are imported from overseas, either made overseas, assembled overseas with overseas components. Those are all subject to varying degrees of tariffs from various countries. That has not turned out to be the case. It does seem that the point of this tariff policy as initiated by the administration was to renegotiate the tariff policies with many countries around the world. OK, so what would you say is the biggest contributor to this sharp slowdown of inflation? Probably energy prices, because energy prices, we have a new, different, very different energy policy in place right now in the United States. Gas prices, many energy prices are off. And if you look at an industrial economy such as we have, energy prices factor into every single thing that we do, say, eat, walk with, anything. So it's an overall negative impact on inflation. OK, so how do you think the Fed is taking this? Let's talk about that. Do you think after seeing this, this will make them more comfortable in cutting rates? I would think so, but I don't think the Fed is going to be doing anything right now until we It certainly makes the problem of inflation, I mean, we are now at 2.4%. Granted, the Fed prefers to use the PCE account, which is a little higher, but we're now at 2.4%. That's only one month. If it continues there, the Fed's longtime goal in inflation is 2%. We're very close to that, and we're certainly headed in the right direction. So the Fed has now, has the ability to stop worrying so much about inflation. It also, when the tariffs were first instituted and that policy came about, was very concerned, and they said so publicly, about the impact on inflation of tariffs. Again, that did not happen. So we have a twofold impact. One, what they were concerned about was in tariff inflation, which didn't happen, or hasn't happened yet. And two, the overall rate of inflation, which of course, incorporates other things. Both are to the benefit of the consumer right now in lower inflation. So yes, they will have, if they decide to, more room to lower rates. So you bring up the central bank's 2% target, we're at 2.4%, but on the core side, we're at 2.5%, and this is the same level before the inflation crisis, before the pandemic. I mean, at what point, at what percent would you say the Fed should just declare victory? Does it necessarily have to be exactly 2%? No, it doesn't. And if you remember, in the long run after the financial crisis in 2008, the problem then was inflation wasn't high enough. It was too low, and the Fed kept saying for month after month, year after year, inflation is moving in the right direction. The Fed is not wont to declare victory. I guess they're worried that as soon as they declare victory, they're going to get a bad month, and they won't look very good at it. So I don't think that's the case. I think what is going to be far more telling is what they do with policy, whether they're out there saying, okay, we're at our goal here, we're not going to do anything. Look at policy, look how that changes. Okay, so in terms of the curve, is the Fed behind it? Is it in front of it? Is it where it should be when it comes to rate cuts? Rate cuts, that depends on who you ask. I mean, if you ask the administration, the Fed is woefully behind in rate cuts. If you look at the growth in the economy, it's running somewhere between three and a half and four, maybe a little bit more for three quarters now. That does not look like an economy that is being restrained by higher rates. So if you look at the last job numbers we have, 130,000, almost three times what was expected. But more importantly, that 130,000 is really about 170,000 private sector jobs, because 40,000 jobs were lost on the government side, government employment. So just those two numbers, the GDP number and the jobs number, you also had a very good manufacturing ISM number. Those do not look like, as I said, an economy that's being restrained by higher rates. So I don't think that the Fed is going to jump on the bad wagon of the administration and start lowering rates wholesale. I really don't. We may get one or more rate 25 basis point rate cuts than expected when we get the next forward-looking assessment in March. But this is not an economy that looks like it needs much support from lower rates. Okay, so let's talk more about the economy. Do you think this latest data point of the CPI, do you think this is a win for the Trump economy, confirmation that the policies are working? I think it probably is. I mean, and any administration that gets positive economic news, whether it's jobs, growth, inflation, inflation moving in the right direction, is going to take credit for it. There are a couple of things going on here. One, of course, the inflation of the Biden administration of those four years was primarily a liquidity event, and it eventually tapered off. So that was going to be diminishing, regardless of what the Fed did. The Fed's increase in policies helped that along. We also have, as I said, changes in one of the basic industrial commodities, that is oil and energy, that are driving inflation in the other direction as well. So all of these things involved take inflation in the direction where the administration and the Fed wants it to go. As I said, they're going to take credit for it. Credit is due in a number of places. Okay, sounds good, Joseph. Thank you for speaking with us today. Thank you for having me. It's always nice to be here. Likewise.