jakiro
For several years, U.S. inflation indicators have been highly synchronized with commodity price trends, forming a relatively stable economic signal.However, for the first time since the outbreak of the COVID-19 pandemic in 2020, this pattern has diverged significantly.According to the U.S. Bureau of Labor Statistics (BLS), as of September 2025, the Consumer Price Index (CPI) has increased by 3.0% year-on-year, falling from the peak of 9.1% in 2022 to near the pre-epidemic level (about 2% to 3%).At the same time, the Bloomberg Commodity Index (BCOM) shows that the prices of key commodities such as oil, wheat, natural gas, soybeans and coffee are still about 50% higher on average than before the epidemic.This disagreement reveals the core problem of the current economy: although official data shows that inflation has cooled, the real cost of living remains high, highlighting the limitations of the CPI as an indicator of year-on-year change – it captures the speed of price changes but ignores the fact that absolute price levels have permanently risen.
The “appearance cooling” of CPI conceals the real risks of absolutely high commodity prices, widening cost of living gaps, and disconnection between finance and entities. Traditional policy tools are no longer adequate under the new paradigm dominated by supply constraints.Behind the differences are structural cracks, which may turn short-term stability into a long-term crisis—either repeating the stagflation of the 1970s, or facing the dual impact of bursting financial bubbles and social divisions.
Analysis of the composition of CPI – why 3% conceals the real pressure
As the core benchmark for measuring inflation, CPI’s weight distribution and statistical logic determine that it cannot fully reflect the real life pressure caused by high commodity prices.In 2025, the weight structure of the U.S. CPI basket is: goods account for only 24%, services account for 42%, housing accounts for 33%, and energy accounts for 7%.This weight distribution directly explains why the high commodity prices are not fully reflected in the overall CPI – not only because the commodities account for a low proportion in the basket, but also because the CPI measures the speed of year-on-year price changes rather than the absolute price level.Even if the absolute price of goods has increased significantly compared with before the epidemic, as long as its year-on-year increase slows down, the overall CPI will be lowered, thus forming a divergence between data cooling and physical sensation warming.
The persistently high commodity prices are a core manifestation of the inflation divergence, and their impact has penetrated deeply into all aspects of consumers’ daily lives.In 2025, the average price of Brent crude oil will be approximately US$74/barrel, a rebound of more than 80% from the low in 2020. Although it is 20% lower than the peak in 2022, it is still significantly higher than the pre-epidemic level.Affected by weak demand due to global economic growth slowing to 3.2%, oversupply is expected to further push oil prices to $66/barrel in 2026, but this price is still about 20% higher than the average level in 2019.The high price of US agricultural products is also stubborn.
These commodity price fluctuations at the macro level have been directly transmitted to consumers’ daily expenditures.BLS data shows that the average price of milk, eggs, new cars, etc. has increased by more than 30% compared with 2020.Judging from the breakdown of the internal structure of CPI, the commodity component will only contribute 0.3 percentage points to core CPI (excluding food and energy) in 2025. Although this contribution is higher than the pre-epidemic level, it is still difficult to dominate the overall inflation trend.The core reason is that the transmission effect of tariff policy is limited by the weight: at the beginning of 2025, the U.S. tariff rate rose from 2.4% to 8%~9%. Federal Reserve research shows that in similar tariff increases from 2018 to 2019, every 1% tariff increase will be transmitted to a CPI increase of 0.1%~0.2%.The tariff adjustment from February to March 2025 has directly pushed up clothing prices by 8% and food prices by 1.6%. However, due to the limited weight of these goods in the CPI basket, its impact was diluted by the steady trend of major categories such as services and housing.
Price increases are not evenly distributed: food and energy commodities are more severely affected by supply shocks, while durable goods such as cars are significantly affected by tariff policies.The weight of energy commodities in the CPI is 7.5%, but it will contribute an increase of -0.2 percentage points in 2025, mainly due to the decline in international oil prices from the peak in 2022.Service prices (such as medical care, education, and catering) have shown a steady upward trend, with an increase of 3.2% in 2025, mainly driven by wage growth. The tight labor market has caused labor costs in the service industry to continue to rise, and will gradually be transmitted to terminal prices.
This phenomenon does not exist in isolation.In the first half of 2025, global supply chain disruptions, geopolitical tensions (such as conflicts in the Middle East) and U.S. tariff policies exacerbated commodity price volatility.Regarding the inflationary transmission effect of tariff policy, JP Morgan predicts that tariff adjustments in 2025 will push up the core CPI by 0.25 to 0.75 percentage points; while the Yale Budget Laboratory’s calculations are more radical, believing that the overall tariff adjustment will increase the effective tax rate to 22.5%, and ultimately push up the CPI by 1% to 2%.This disagreement essentially reflects different judgments on the transmission efficiency of supply-side shocks. The consensus is that the weight structure and statistical logic of the CPI do underestimate the actual impact of high commodity prices on residents’ living costs.
Cost of Living Gap – Lagging Effect of Wage Growth
Although CPI data shows that inflation has cooled, the real life pressure felt by residents has not eased. The core reason is the persistence of the cost of living gap – wage growth lags behind inflation for a long time, resulting in a decline in real purchasing power.From 2020 to 2025, the average hourly wage in the United States rose from US$29 to US$35, a cumulative increase of 21.8%; however, during the same period, the CPI rose by a cumulative 23.5%, and real wages showed a negative growth of 0.7%.In 2025, nominal wages will increase by 4.2%. Although it exceeds inflation by 1.5%, this growth dividend only covers 57% of workers. The wage increase for a large number of low-income groups and part-time workers is still lower than the inflation level.Data from the Atlanta Federal Reserve shows that between 2020 and 2025, the cumulative difference between wages and inflation was -1.2%, which means that residents’ actual purchasing power has declined compared with before the epidemic.
This cost-of-living gap further amplifies social inequality.Low-income groups spend a significantly higher proportion of their disposable income on food, energy and other necessities than high-income groups, and the continued high prices of these commodities have a much greater impact on them than high-income groups.Morgan Stanley Wealth Management cited data from Oxford Economics showing that the marginal propensity of the lowest income quintile to spend extra income on consumption is more than six times higher than that of the richest groups.This means that when the prices of necessities such as food and energy rise, low-income families have to cut down on other expenses or overdraw their savings to maintain basic living, while high-income groups are minimally affected.
The widening cost-of-living gap has triggered significant credit pressures.The overall savings rate in the United States will drop to 4.6% in 2025, far lower than the 40-year average of 6.4% and the 80-year average of 8.7%. The savings of middle- and low-end consumers are exhausted particularly quickly.To fill the gap, they were forced to rely on credit facilities, causing the risk of debt defaults to soar: the 60-day delinquency rate for subprime auto loans hit 6.7%, the highest level since 1994.This model of relying on loans to support consumption is unsustainable. Once credit channels tighten, it will directly trigger the shrinkage of the consumer market.
What is even more alarming is that the living cost gap is weakening the endogenous power of economic growth.Although mid- and low-end consumers only account for 40% of overall economic consumption, they are the core force driving marginal consumption growth – consumer spending accounts for two-thirds of US GDP, and their resilience directly determines the economic trend.Lisa Shalit, chief investment officer of Morgan Stanley, clearly warned that real cracks in the middle and low-end consumer groups are making the economic outlook in 2026 increasingly fragile.
The disconnect between financial markets and the real economy
The difference between high commodity prices and cooling CPI has also given rise to a serious disconnect between the financial market and the real economy: on one side, ordinary people are under pressure from the cost of living, and on the other side, asset prices continue to boom, forming a peculiar pattern of two faces of the economy.In 2025, the S&P 500 Index rose by 15%, corporate profits hit a record, Goldman Sachs’ asset management scale climbed to US$2.5 trillion, and financial market expectations for cooling inflation and loosening of policies dominated the logic of asset pricing.
As a traditional inflation hedging tool, gold’s price trends more intuitively reflect the market’s concerns about potential risks.The price of gold will soar from US$1,900 in 2023 to US$4,211 in 2025, an increase of more than double. This trend is highly similar to the gold price trajectory at the beginning of the inflation wave in 1971 – at that time, gold also reflected the risk of currency depreciation and inflation in advance before the CPI had yet to reach its peak.J.P. Morgan predicts that the price of gold will further rise to US$4,700 in 2026. Core supporting factors include continued gold purchases by global central banks (annual gold purchases are expected to reach 900 tons) and early pricing of stagflation risks.
There are multiple driving factors behind this disconnect: First, the Fed’s easing expectations are mainly good for financial assets. Although the 75 basis point interest rate cut in 2025 did not significantly reduce the prices of people’s livelihood commodities, it provided liquidity support for the stock market; second, companies pass on costs (such as tariff costs to consumers).) and supply chain optimization have maintained profit growth despite high commodity prices, resulting in a differentiation between the real economy being under pressure and corporate profits improving; thirdly, global capital’s allocation demand for U.S. assets is still rising. Even if there are hidden concerns about economic fundamentals, the relative attractiveness of U.S. dollar assets still supports market confidence.
It must be pointed out that a state of disconnection carries huge risks.Royal Bank of Canada economists warned that if the financial market’s expectations for policy easing go too far, once the peak of the tariff transmission effect appears in 2026, inflation rebounds more than expected, or economic growth accelerates and declines, it will trigger a sharp correction in asset prices and may even cause the financial bubble to burst.Apollo chief economist Thorsten Slok further listed five potential risk points: reflation caused by supply-side constraints, global manufacturing recovery that is less than expected, investment bubbles in the AI field, liquidity crisis in the U.S. Treasury market, and the possibility of political intervention in the Federal Reserve policy. These risks may become the trigger to break the balance between the market and the entity.
The pattern of high prices and low growth will continue, leaving the Fed with a dilemma
The overall inflation in the United States will show a downward trend in 2026, and inflation may fall back to 2.6% as predicted. However, the pattern of high prices and low growth will continue, and it may take 4 to 5 years or even longer to close the cost of living gap.After 2026, it will not heal naturally, but will test the US’s institutional flexibility and policy wisdom in a more extreme way.
Structural constraints on the supply side, the lagging effect of tariff policies, and the stickiness of wage growth will all keep inflation at a relatively high level, which means that residents’ cost of living pressure will be difficult to significantly alleviate in the short term.The future direction of the U.S. economy essentially depends on whether it can rebalance the three goals of price stability, asset security and social equity in the era of supply constraints, redefine the connotation of economic stability under supply constraints, and find a new balance between people’s livelihood and well-being and financial security.This is not only an economic issue, but also the ultimate test of the country’s governance capabilities.The key is to break through the shackles of political polarization and shift from demand management to supply restoration: reducing market distortions through rational tariff policies, easing supply constraints through immigration and energy reforms, and improving long-term productivity through infrastructure investment.
In the current political environment, such reforms face huge resistance.In December 2025, more than 40 members of Congress jointly requested the Federal Reserve to redefine the maximum employment target to include food and energy affordability. This demand essentially requires the central bank to transcend the boundaries of its traditional responsibilities and intervene in supply-side management.If a mild version of stagflation occurs in 2026-2027 – CPI rises again to 4.5% to 5%, and the unemployment rate rises to 6% simultaneously, the Federal Reserve will face unprecedented political pressure.However, the failure of tariff policy has proven that inefficient supply-side intervention will only be counterproductive.
At the same time, every time tariffs are imposed, oil-producing countries are sanctioned, and technology exports are restricted due to domestic inflationary pressures, they push other countries to accelerate the “de-dollarization” process.If the United States is forced to radically raise interest rates in 2027 due to a second wave of inflation, emerging markets may erupt in version 2.0 of the 2013 taper panic, triggering a chain reaction of capital outflows, currency collapse, and debt defaults, which will ultimately backfire on demand for U.S. Treasury bonds. If there is a liquidity crisis in the U.S. bond market, which is the core support for U.S. dollar hegemony, the 10-year U.S. bond yield may soar to 6% to 7%, completely ending the low interest rate era of the past 15 years.
All policy dilemmas ultimately point to a cruel reality: in the era of supply constraints, price stability and asset prices cannot be achieved at the same time, and a trade-off must be made.Once secondary inflation breaks out, the Fed will be forced to choose between a dilemma: either restart Volcker-style aggressive interest rate hikes and suppress inflation at the cost of economic recession, which will severely damage the real estate market and corporate investment that rely on low interest rates; or succumb to political pressure and stop tightening early and allow inflation expectations to derail.However, no matter which path is chosen, the picture of “asset prices rising forever and the middle class steadily getting rich” established from 2021 to 2025 will collapse.In the future, fiscal policy will be forced to shift from demand stimulation to effective supply intervention. If the political deadlock cannot be broken, fiscal policy may fall into a three-loss cycle of “increasing tariffs – higher inflation – lower growth – and larger deficits.”
Inflationary fission has become a structural fault line tearing apart the U.S. economy, policy, and society. The United States is facing challenges it has not encountered in forty years.
