In the realm of economic analysis, let’s indulge in an intellectual exercise. Picture this: two datasets are laid before you, each illustrating a trio of sequential readings on core Consumer Price Index (CPI) metrics in the United States. These metrics encompass core goods and services with an emphasis on the ‘supercore’ CPI segment.
Now, here’s the challenge: without resorting to any external tools such as Bloomberg or Google, can you discern which sequence of core CPI data is from a period before the pandemic struck, and which is from the present times?
The task might seem straightforward, but it has proven to be a stumbling block for many, including some of the sharpest minds managing hedge funds, who found themselves ensnared in error.
In both scenarios under discussion, the monthly movements in the core CPI averaged between 0.15 to 0.20, aligning closely with the Federal Reserve’s annual inflation target of 2%. An interesting observation within the data was how goods inflation hovered around 0%, with core and super-core indices being the main contributors to the relatively subdued inflationary pressures.
Unveiling the answer to our initial puzzle, the second dataset encapsulates the period of June to August 2019, whereas the first presents data from March to May 2025.
This revelation warrants a moment of reflection. In the early months of 2019, Jerome Powell, the Chair of the Federal Reserve, made a significant departure from prior policies by adopting a dovish stance. He communicated emphatically that the period of tightening monetary policies had concluded, and the focus was now on fostering conducive financial conditions.
During that summer, monthly CPI movements exceeded the present rates, the unemployment rate was significantly lower and stable at 3.7%, and in response to this economic environment, the Federal Reserve undertook rate cuts, bringing them down from 2.25% to 1.50% in the third quarter of 2019.
Fast forward to the current situation: the recent core inflation readings average at 0.14% on a monthly basis, with a notable decrease in services inflation. Concurrently, the unemployment rate has been on an uptrend, currently at 4.24%, while the Federal Reserve’s funds rate towers 200 basis points above what it was in the summer of 2019. Such conditions hint at a potential dovish fallback by the Fed in the near future.
Moreover, amidst discussions dominated by tariff concerns, it’s essential to remember that core goods contribute to merely around 20% of the core CPI basket. The crux of inflationary dynamics actually revolves around services and housing inflation or disinflation, to be precise.
On this front, WisdomTree has developed a forward-looking core inflation metric that incorporates real-time housing inflation figures instead of relying on the traditionally lagging shelter CPI metric. For approximately 18 months, this real-time measure had hovered around the 2% mark, juxtaposed with the official core CPI figures that were propelled higher due to the delayed reaction of shelter CPI.
Given that housing accounts for a significant 35-40% of the core CPI basket, its impact is substantial. The lagged adjustment in housing inflation suggests a likely continuation of the trend, whereby the official core CPI could persist in its downward trajectory as the actual shelter inflation decelerates.
An illustrative case in point is the period around mid-2021 when the housing market was exceptionally buoyant. The subsequent delay in reflecting this surge in the official core CPI figures led to a belated tightening of policies by the Fed. The reverse scenario unfolded in 2024, signaling an urgent need to closely monitor the Federal Reserve’s actions for any dovish shifts.
Intriguingly, this analysis began with a mention of the term ‘null komma null’ – a German phrase translating to “zero point zero,” signifying an inconsequential difference in excess inflation between pre-pandemic times and today.
Yet, another dimension of “null komma null” has critical implications for market dynamics and asset allocation decisions. A dialogue between a seasoned hedge fund portfolio manager and a German pension fund manager unveiled that, despite the apparent decoupling between the US dollar and risk assets, no additional hedging activities against the dollar had been undertaken.
The reluctance stems from the hefty costs associated with foreign exchange hedging, which remain burdensome for pension funds and insurance firms that are already striving to meet ambitious return targets. Such entities are traditionally entrenched in long USD positions, a stance that becomes increasingly untenable should the Federal Reserve pivot towards a more dovish policy, thereby reducing USD hedging costs and likely depreciating the dollar further.
Should these dynamics unfold, a swift increase in hedging demand from these financial behemoths could precipitate a rapid depreciation of the US dollar.
For investors, the strategic implications are clear-cut: sell the US dollar and seek refuge or profit in assets that traditionally perform well in such scenarios. Preferred choices might include currencies likely to benefit from hedging flows, equities in sectors or regions with robust pricing power or commodities like metals, which tend to appreciate under dollar weakness.
This discourse not only offers a deep dive into the nuanced interplay between inflation metrics, monetary policy, and currency dynamics but also underscores the critical importance of staying informed and agile in the ever-evolving economic landscape.
