Trump's New Image, New Interpretation of Inflation
This article analyzes different dimensions of inflation in the United States and proposes a division of inflation into tradable and non-tradable sectors. Data shows that about three-quarters of the CPI reflects the supply and demand situation in the non-tradable sector, and inflation in the tradable sector has been in deflation for nearly two years. Although deflation in the tradable sector may have ended, high inflation in the non-tradable sector continues to affect the underlying population, becoming an important variable in the 2024 U.S. election. The current economic cycle has not been broken, as reflected in the earnings of companies during the U.S. stock earnings season exceeding expectations
Traditional CPI analysis divides inflation into core services, core goods, energy, and food categories. However, from a trade perspective, inflation can also be divided into tradeable sector inflation and non-tradeable sector inflation.
Tradeable sector inflation is mainly driven by exogenous price changes due to fluctuations in global trade conditions (including supply chain shortages post-pandemic and potential tariffs), while non-tradeable sector inflation primarily reflects endogenous economic conditions.
The 177 components of U.S. inflation include 91 tradeable components and 86 non-tradeable components, nearly evenly split; however, the weight differences are significant. Tradeable inflation accounts for 24.85% of CPI, while non-tradeable components account for 72.40% of CPI (which is almost equivalent to the weight of core services + food).
This means that about three-quarters of the U.S. CPI reflects the supply and demand situation in the non-tradeable sector; therefore, the U.S.-China trade friction and structural tariffs from 2018 to 2019 did not lead to an increase in U.S. prices.
The year-on-year growth rate of U.S. tradeable sector inflation has been negative since March 2023, entering the "deflation" range for nearly two years (only temporarily turning positive in September 2023). Moreover, January 2025 will mark the first time in 15 months that both tradeable inflation and goods inflation will simultaneously turn positive again, while core goods inflation year-on-year has also narrowed to -0.07%.
![](https://mmbiz-qpic.wscn.net/mmbiz_png/a9QkCiaHkK69qDk8qjGIicyX7MIlxLtv3gIMIK38K7QZm7PFpaDGicXkTtOD9QhdOe3tcXric1ra0k97jAZDvSDKzw/640? Considering the potential impact of tariffs on "tradeable inflation," the "deflation" in the U.S. tradeable sector is likely over. Meanwhile, inflation in the non-tradeable sector is even higher than core services inflation, reflecting that the lower-income population in the U.S. continues to be troubled by high inflation, which may become the most significant variable affecting the 2024 U.S. election.
After the pandemic, core services inflation remained more than 0.5 percentage points lower than non-tradeable sector inflation for a long time, and both are significantly higher than pre-pandemic levels.
The current positive cycle of the U.S. economy has not been broken; rather, it is self-reinforcing under the Federal Reserve's excessive interest rate cuts, reflected in the slowing downward slope of non-tradeable sector inflation, which may even rebound in the second half of 2025.
The resilience of non-tradeable sector inflation demonstrates the strong endogenous momentum of the U.S. economy, which corresponds to the earnings season of U.S. stocks, where most companies' profits exceeding expectations is not surprising.
However, the resilience of non-tradeable sector inflation still only represents the state of the U.S. economy before Trump took office. It is important to note that uncertainties regarding immigration, tariffs, and spending cuts in 2025 are mutually reinforcing.
How these accumulated uncertainties will transmit to inflation is worth observing. The recent surge in inflation expectations is just one aspect, and more concrete feedback may be seen in the future.
Overall, growth and inflation are two sides of the same coin regarding insufficient interest rate constraints; however, so far, neither the January non-farm payrolls nor inflation data has reflected the substantial impact since Trump took office.
The chaos brought about by "Trump's reforms" may partially "hedge" the current insufficient interest rate constraints in the U.S. The possibilities of "chaos leading to rate cuts" and "re-inflation forcing rate hikes" coexist, and the upper and lower limits of future U.S. economic fluctuations will be further opened by the "Trump" combination.
Author: Song Xuetao (S1110517090003), Zhong Tian, Source: Xuetao Macro Notes, Original Title: "New Image of Trump, New Interpretation of Inflation"
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