Apollo says inflation looks sticky – very sticky

Inflation isn't retreating to the Fed's 2% target as hoped. At 3-3.3%, it's proving sticky with multiple tailwinds from tariffs, fiscal policy, high-net-worth spending largess, to housing pressures. Both market-based and survey measures show inflation expectations rising.

Meanwhile, consumer sentiment is in decline according to recent surveys from The Conference Board and University of Michigan. The economy is looking lopsided, with the top 10% of U.S. earners driving nearly half of all consumer spending.

So what?

• The 3% floor is real. Core CPI, median CPI, and sticky price measures all sit stubbornly above the Fed's 2% target with upward momentum.
• Housing inflation isn't done. Apartment deliveries slowing later in 2025 will put upward pressure on rents after a brief respite.
• Political expectations flipped. Democrats now expect 5% inflation while Republicans expect nearly 0% – a complete partisan reversal from the Biden era.
• Market signals are clear. Inflation swaps indicate markets expect 3% inflation persisting through 2025-2026, not returning to 2%.
• Trump presidency tailwinds. Tariffs, deregulation expectations, and immigration restrictions are creating demand pull-forward and inflation expectations.

What's next?

The Fed's singular focus on getting to 2% might actually be counterproductive. After years of fighting inflation, the public is mentally adjusting to a 3% world.

What if 3% is our new normal? Markets are pricing it, consumers expect it, and businesses plan for it. Fighting for the final percentage point risks unnecessary economic pain.

The political reversal in inflation expectations is fascinating – suddenly Democrats see inflation everywhere while Republicans see none. Inflation perception is now more about partisan identity than economic reality.

Counterpoint

The real question isn't "How do we get to 2%?" but rather, "Is 3% inflation actually harmful to the economy?"

Evidence

The above pov is based on the latest inflation reporting from Torsten Slok and the team at Apollo. Their inflation outlook can be downloaded here. Follows is a summary of the key insights from the charts in their deck:

• The 3% floor. Pages 6-9 show headline CPI at 3%, core CPI at 3.3%, with 3-month and 6-month annualized changes moving higher. Page 10 shows Fed measures of inflation stickiness all above 2% and page 11 shows trimmed mean and median CPI well above 2%.
• Housing inflation concerns. Page 16 specifically charts the risk of a rebound in housing inflation, showing the correlation between home prices (with a 14-month lead) and subsequent rent inflation. Page 17 supports this with indicators of housing inflation from multiple data sources.
• Political expectations flip. Pages 24-25 contain the striking charts showing Democratic vs Republican inflation expectations completely inverting. In early 2021-2023, Republicans consistently expected much higher inflation than Democrats, but by early 2025, Democrats expect 5% while Republicans expect near-zero inflation.
• Market signals. Page 15 displays the market-implied CPI from inflation swaps showing expectations stuck around 3%, and pages 27-28 show breakeven inflation measures from various tenors.
• Trump presidency tailwinds. Page 3 outlines all ten inflation tailwinds, with the first three being tariffs, post-election economic acceleration, and demand pull-forward due to tariff fears.

Source & inspiration: Torsten Slok's daily newsletter, 2/25 "US Inflation Outlook."