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Demand destruction



The new American CPI numbers came out yesterday and the news is excellent, inflation is down 0.5% which no one expected!   

That's the good news, now the not so good news.   Oil prices are stripped from that dataset, its normal, fuel prices distort the "economic indicator".  However, the CPI figures have to be taken with a grain of salt (always mister negative – as the title indicates).  The 2020 pandemic led to massive consumer price increases.  What no one noticed is that since then prices have not fallen back, as a stupid example. In 2019, a brick of espresso coffee was £2.35.  Last week the same brick of espresso coffee was £6.75. Same brand, same size – almost three times as expensive.  

Now, the point is as follows, and it's important, Americans have for years replaced revenues to meet their expenses with savings and debt.   This is not a secret to anyone in the world.   Americans have more debt today and less savings than ever before.   However, at one point they ran out.   Walmart said it best, they cannot raise their prices anymore, because sales are declining.  What we appear to be seeing is demand destruction. Once all the available tools have been used up then consumers have to reduce expenses.   Fuel is usually essential, it's how they get to work, and Americans generally drive big petrol guzzling vehicles, in addition, the cost of energy (electricity) has also been rising quickly.  

The US labor market has been in contraction for more than a year, only 175,000 jobs were created in 2025 (annual average for the past decade is 1.8 million net jobs).   This is the "other shoe" because service providers who cannot raise their prices, because of higher input costs, have to reduce costs elsewhere, and the only easy variable is labor.   Hence the massive job losses.  So what we are seeing here is "lower inflation" caused by demand destruction.  Stores cannot increase prices because shoppers cannot afford the higher prices.  

What is the long term impact? Well, America doesn't have to guess, they only need to watch Japan.  After the excess of the 1980s, Japanese consumers began reducing debt, and the drive has not stopped since (granted there were other aspects to the demand destruction there – demographics).  American consumers have reached their limits.  In the short term, some workers will accept lower wages in exchange for changes in work environment (aka working from home).   Fundamentally, lower inflation is not a sign that costs are under control, they are not, PPI is still rising, it's a condition of the market where wages (and debt and savings) are insufficient to meet the consumers' basic needs.   

The dichotomy between the PPI and the CPI is the strongest signal that not all is well. In addition if the US economy was healthy it would be creating jobs, not destroying them.


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