This post was authored by Adem Tumerkan, Dunham's Content Writer. If you have questions concerning today's topic, please call us at (858) 964 - 0500. Hold us to higher standards.

Markets Cheer Slower Inflation - But Does the Bigger Picture Tell a Different Story?

  • December inflation came in lower than expected, easing market fears and boosting rate-cut bets. 
  • Oil prices and rising money supply could keep inflationary pressures alive, despite slowing CPI growth. 

What you need to know: U.S. consumer inflation rose less than expected in December, easing pressure on bond markets and fueling hopes for earlier Fed rate cuts. 

Why it matters: The consumer price index (CPI) rose 0.4% in December, bringing annual inflation to 2.9%, in line with forecasts. But the Core-CPI - which excludes food and energy - dipped to 3.2%, slightly below the 3.3% estimate and marking its first decline since August1. Shelter costs, which make up a third of CPI, increased 0.3% on the month and 4.6% on the year - the smallest annual gain since January 2022, though still historically high. 

Now the Dunham Deep DiveMarkets have been drifting sideways since mid-December when the Fed threw ice water on expectations for aggressive rate cuts in 2025 (they signaled just two, while markets had priced in four).

Meanwhile, bonds have sold off hard as investors started believing inflation would stay sticky, thus keeping rates higher for longer.

That’s why this week’s inflation data mattered - it gave markets some much-needed relief, hinting that inflation may keep slowing and rates will keep dropping.

But – as always - there’s more to the story. . .

For starters, oil prices have surged since December. West Texas Intermediate (WTI) - aka the benchmark for U.S. crude - jumped 12.7% in the last month. That rise will likely filter through, keeping prices elevated (especially the headline inflation number).

Secondly, the money supply is growing faster than the economy. As of November 2024, M2 - aka the liquid money supply - expanded 3.7% year-over-year, up from 3.1% in October2. Meanwhile, GDP grew just 3.1% in Q3 (from 3.0% in Q2). More money chasing fewer goods often fuels inflation.

Remember, inflation is much higher than before COVID - up about 25% - but the Fed only cares about its annual growth rate. That’s what they mean when they say, “We want 2% inflation”.

  • Think of a candy bar. Before COVID, it was $1. Now, it’s $1.25 - a 25% jump. If inflation slows to 2% per year, that doesn’t mean prices fall. Next year, that same candy bar will cost 2% more than $1.25 (about $1.28). And the year after that, it rises 2% again, and on and on.

So, slowing inflation doesn’t mean lower prices - just that they keep rising, but not as fast.

For now, markets are happy. Just keep this in mind as the inflation tug-of-war plays out.

PS – a bit of humor: Core CPI came in at 3.248%, but it got rounded down to 3.2% - just below the 3.3% estimate. That tiny 0.002% gave markets what they needed to rally, sending trillions into assets. Somewhere at the BLS, an unsuspecting analyst just saved the day. . .

Figure 1: Bloomberg, January 2025

 

Shipping Slowdown: The Cass Index Signals Trouble, But the Recession Might Just Be Stuck in Transit

  • The Cass Freight Index has fallen year-over-year for 24 straight months, a rare decline that often signals economic slowdowns. 
  • While freight data looks weak, changing supply chains and private fleets may be distorting the picture, meaning overall demand could be stronger than it appears. 

What you need to know: The Cass Freight Index - a key gauge of U.S. shipping activity - plunged in December 2024.

Why it matters: The Shipments Index dropped 2.6% in December, wiping out November’s 0.5% gain, and plunged 5.7% year-over-year. declining Cass Freight Index signals weaker demand, slowing industry, and, if it persists, could warn of a looming recession3. 

Now the Dunham Deep Dive: The Cass Freight Index is known as a leading indicator – meaning it often moves before job data or retail sales. Thus, analysts watch it closely for early signs of good news or bad news.

And right now, it still points to a cooling economy.

To put this into perspective, shipment volumes have fallen year-over-year for 24 straight months - an unusually long decline. And less freight usually means weaker demand, a trend that has historically preceded recessions.

But why then hasn’t a downturn hit yet?

Well, while the index tracks big trucking firms, it misses key parts of today’s economy. . .

For instance, it excludes private fleets like Amazon and Walmart, underrepresents small operators, and doesn’t track last-mile e-commerce deliveries or bulk commodities moving by rail and pipeline.

So, while the Cass Freight Index is still valuable, structural changes - like big companies building private fleets and e-commerce networks - may be lowering its accuracy.

For a clearer picture, it's worth cross-referencing this index with corporate logistics data (like FedEx earnings) and the government's Freight Transportation Services Index (TSI).

But for now, Cass Freight shipments look anemic, yet overall demand may be stronger than it shows.

Then again, maybe the recession is just stuck in transit - delayed, rerouted, and waiting for final delivery.

Time will tell.

Figure 2: Cass Information Systems, INC., January 2025

 

America’s Population Boom: Record Immigration Fuels Fastest Growth Since 2001 

  • The U.S. population grew 1.0% in 2024, its fastest rate since 2001, with immigration accounting for the bulk of the increase. 
  • Higher immigration boosts demand for housing, goods, and services, adding to inflationary pressures at a politically sensitive time.

What you need to know: According to Wells Fargo, the U.S. population grew 1.0% in 2024, the fastest expansion since 2001 with immigration as the driving force4. The country added a record 2.8 million net international migrants - the highest annual total ever recorded. Meanwhile, population growth from natural causes (births vs. deaths) only amounted to 519K, more than 40% below the increase in 2019. The Census Bureau also revised past estimates, doubling 2023’s migration count to 2.3 million and raising 2022’s total 70% to 1.7 million, reflecting previously undercounted refugees and asylum seekers. 

Why this matters: For years, U.S. demographics have been sliding as fertility rates fall, a trend seen across the developed world. But immigration has kept population growth alive. But more immigrants mean higher demand for goods, housing, and services - adding fuel to inflation. Furthermore, with President Trump back in office and promising tough immigration policies, this may become a much more contentious topic. 

Now the Dunham Deep Dive: Demographic trends are extremely important when gauging an economy's outlook. 

As mentioned above, if a population grows too quickly, demand for goods, housing, and services surges, pushing prices higher. And this can create a cycle - more births lead to more people, which leads to even more births and more demand. 

  • Pro: A growing population fuels consumption, job creation, and economic expansion.
  • Con: Rapid growth can be inflationary, leading to shortages and higher living costs.

On the other hand, if a population shrinks, demand weakens, leading to stagnation or even deflation. This too can spiral - fewer births today mean even fewer in the future, deepening demographic decline and reinforcing the spiral. 

  • Pro: A smaller population reduces demand, leading to lower prices
  • Con: Falling demand squeezes profit margins, slows economic growth, and strains social programs.

Policymakers try to manage this delicate balance. But for decades, developed nations have struggled to reverse sinking birth rates. I explored this in "They Say Demographics Are Destiny: If So, Things May Look Pretty Bleak," where I laid out the risks of declining births and rising life expectancy – a potential economic time bomb (think of Japan, Italy, China).

So, when domestic birth rates can’t sustain population growth, immigration becomes the next best path.

But immigration policy is a touchy topic. . .

Too much immigration can push rents and home prices higher, making it harder for native-born citizens to afford housing and inflame resentment.

Just take a look at Canada. Prime Minister Justin Trudeau had faced backlash over soaring living costs - especially in housing – due to immigration5.

Because of this, Trudeau cut immigration targets by over 20%, reversing his earlier pro-immigration stance.

It’ll take time to see if this helps or hurts Canada’s economy, as the country still relies on immigration for growth. But it may serve as a warning for the U.S. - especially with housing supply already lagging.

So, while immigration may be the fuel for economic growth, that doesn’t mean it doesn't come with side effects.

Figure 3: Wells Fargo, January 2025 

Anyway, who knows what will happen?

This is Just some food for thought as we watch how these trends develop.

As always, we’ll be keeping a close eye on things. Enjoy the rest of your weekend.

Sources:

  1. US Core CPI Finally Eases, Rallying Bets for Fed to Cut Sooner - Bloomberg
  2. M2 (M2SL) | FRED | St. Louis Fed
  3. Cass Transportation Index Report | December 2024 | Cass Information Systems
  4. Wells Fargo - Immigration Fuels U.S. Population Growth in 2024
  5. Immigration is making Canada's housing more expensive. The government was warned 2 years ago | CBC News

Disclosures:

This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.

Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.

Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA/SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.

SUBSCRIBE TO
THE DUNHAM BLOG