The Economy’s False Sense of Security
The recent consumer price index showed a 0.3% monthly rise and a 3% year-over-year rate, with the core index rising 0.2%. While this may seem like a positive sign, veteran economist Diane Swonk warns that the economy "looks better than it feels" due to the eroding data used to measure it. The illusion of resilience could shatter heading into the fourth quarter.
A Split in Consumer Spending
Swonk points out that only groups making over $200,000 and having large stock portfolios feel good about the economy. Lower- and middle-income consumers, on the other hand, are pushing back, trading down, stretching budgets, or delaying purchases altogether. This bifurcated consumer base is causing a "K shaped economy," where affluent households continue to spend freely, while others struggle to make ends meet.
The Hidden Problem of Inflation
Energy costs were the main driver of inflation, with gasoline up 4.1%, while food prices moderated, and core inflation slowed to 0.2%. However, Swonk sees a slow-moving problem that’s partly statistical, partly structural, and increasingly psychological. Beneath the surface, the U.S. is running on shaky footing, both economically and in terms of the quality of the data that guides policymakers.
A False Sense of Calm
Swonk argues that many categories holding inflation steady are either insulated from tariffs or benefiting from temporary waivers. Once these fade, "goods prices are still moving up," she said, with few signs of broad-based disinflation. The stickiness in service-sector prices and the widening split in who’s actually feeling relief are causing a false sense of calm.
The Fragility of Economic Data
Swonk also believes that part of the gap between reality and perception stems from the government’s diminished capacity to collect and verify data. The Bureau of Labor Statistics is operating with roughly 20% fewer staff than before the pandemic, resulting in more than a third of price data in the CPI being imputed rather than directly observed. This means that official inflation readings may be smoother than the real-world volatility consumers experience.
A Tougher Road Ahead
Looking forward, Swonk expects the economy to slow "dramatically" in the fourth quarter, a turn she says was already coming before the shutdown drained 750,000 federal paychecks from the economy. Consumer stress, rising delinquencies, and tariff pass-throughs will all collide with a fragile labor market and weaker retail season. The government’s tariff waivers may soften some price increases, but she expects uneven effects across sectors.
Conclusion
In conclusion, while the recent consumer price index may seem like a positive sign, the economy is actually running on shaky footing. The eroding data, bifurcated consumer base, and hidden problem of inflation are all causing a false sense of security. As Swonk warns, the economy "looks better than it feels," and the fourth quarter is expected to be a very difficult holiday season. The fragility of economic data and the tougher road ahead are all causes for concern, and it’s essential to look beyond the surface-level numbers to understand the true state of the economy.
