Deflation Remains The Bigger Risk Than Inflation. Here Is Proof.
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To investors, Most capital allocators were freaking out one year ago. The President of the United States levied tariffs on the world economy in early April 2025, which sent markets into a chaotic and turbulent period. Pessimists promised you sky-high inflation, empty shelves, and the next Great Depression. None of that happened though. Instead, the stock market went up 16%, home prices went down, and hundreds of billions of dollars poured into America via foreign investment. But most importantly, we never got the sky-high inflation, which objectively disproves the academic theory that tariffs are inflationary. If you recall, I was one of the lone voices banging the drum that tariffs would be deflationary. Here is the piece that I wrote last April titled âWelcome to the Tariff Era â The Truth about US Tariffs.â If you havenât read it, I highly suggest you do. I argued in the piece that past tariffs had led to lower prices of goods domestically, rather than higher prices. I analyzed the 2018 tariffs and their impact on steel, washer machines, and solar panels. For all three products, prices were lower within 18 months than they had been pre-tariffs. I predicted we would see many of the same things start happening across the US economy. Fast forward to today and we are now starting to see some of the results one year later. Natasha Khan just wrote a piece for the Wall Street Journal explaining how Sharpie, the maker of your favorite markers, has figured out how to manufacture their products at a lower cost by re-shoring their manufacturing. The best part is they have been able to do this without having to fire employees or raise consumer prices. Narrative violation. But we are not just seeing lower prices in tariffed goods. Truflation reported their latest data for the start of April and it serves as a check against the current mainstream consensus. The company writes: âThe US inflation index went down quite significantly today from 1.77% to 1.26%. Truflation CPI often shows larger monthly shifts on the 1st of each month because multiple data providers update their data. This time, the shift is downwards and unusually strong, highlighting multiple sticky deflationary trends across major categories, while gasoline prices continue to go up and have driven inflation higher over the past month. Main drivers of this renewed deflationary wave: Transport (-0.17%) - Used and New car price inflation is decreasing despite being offset by the Gasoline prices going up. Food (-0.10%) - Food at home and Food away from home inflation is dropping. Utilities (-0.10%) - Natural Gas prices are declining. Housing (-0.09%) - Prices are dropping across all 3 sub-categories: Rented, Owned, and Other Lodgings.â Now I know many people are skeptical of Truflation, but I continue to believe it is the single most valuable and accurate measurement of real-time inflation in the United States. They use over 14 million data points coming from over 40 independent data providers. Is it perfect? Probably not. But it is definitely more accurate than the CPI calculation from the Bureau of Labor Statistics. Plus, Truflation has a 98% correlation to CPI, with CPI having a one-month lag. The reason this is important right now is because Truflation is telling us that the short-term impact from rising oil and gas prices is not going to be as pronounced on inflation as everyone is predicting. Let me explain what I mean. Gas prices are now over $4 per gallon in the US. The media will rightfully call out the potential economic pain from this development, but there is some important nuance that you wonât read in the headlines. You are going to read that every visit to the pump costs more, small businesses get squeezed, shipping prices rise, and that flows into everything from groceries to Amazon orders. This is all true and unfortunately these negative impacts hit lower-income households the hardest. But $4 gas is not going to derail the US economy. Most people are stuck in the 2008 mindset, but thankfully that is not the world we live in anymore. Cars are more fuel-efficient, EV adoption is growing, wages are higher in nominal terms, and the economy is less energy-intensive than it used to be. On top of this, America is producing more oil than ever, so high oil prices incentivizes more investment and it creates more jobs domestically. These may not be exciting consolation prizes, but they are factual ramifications from high prices. So what is likely to actually happen from these higher prices at the pump? We probably donât experience a big crash directly from high gas prices. Instead, we see a slow bleed across markets. Consumers pull back a little, sentiment weakens, and politicians start sweating. But $4 gas alone isnât enough to break the economy. The real danger is stacking negative economic trends. If high gas combines with sticky inflation, high rates, or a weakening job market then thatâs when things could quickly unravel. If we donât get the combination of factors, most of the headlines will be overdone. So for right now, the biggest impact of high gas prices is not economic, but rather psychological. This brings us back to the recent Truflation data and the example of Sharpie. The structural setup for the US economy right now has deflation as a much bigger risk than inflation. The headlines are screaming about high oil prices, and the ensuing high gas prices, but the situation has not changed in the medium-to-long term. Donât get distracted. Tariffs, deportations, AI, and robotics are going to last longer than high oil prices. And those trends will matter much more for your portfolio over the next few years. Have a great day. I will talk to everyone tomorrow. 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