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• The Data Divergence: Why CPI, PPI, and Shelter costs are already cooling
• The "Recency Bias" Trap: Why the market is fighting the last war (Inflation) while ignoring the next one (Growth)
• Lennar, Housing, and the Consumer: Real-world signals of an economic slowdown

While the headlines remain fixated on mounting inflationary risks, the underlying data suggests we are fighting yesterday"s war. Last week, the Fed raised its core inflation projections to a 2.8% annual pace—a move likely fueled by the "perfect storm" of tariff uncertainty and stubborn services costs.

As Warren Buffett succinctly put it: "The tooth fairy is not going to pay for tariffs." They are a tax passed directly to the consumer. However, if we invert the problem—looking at what truly drives long-term asset prices—the real concern isn"t the price of goods, but the health of the engine producing them: Growth.

The Fed"s downward revision of U.S. GDP growth to 1.7% is the signal most are missing. Here is why the inflation "bogeyman" is smaller than it appears, and why growth is the variable that will dictate your portfolio"s performance this year.

The Deflationary Trend Nobody is Talking About

If you strip away services and shelter, inflation is already at or below the Fed"s target. The "recency bias" of the 2022 spike makes people overlook the pink line in the chart below: CPI ex-shelter.

The ex-shelter version of the CPI has increased by 2.3% or less for the past 22 months. Furthermore, "Owner Equivalent Rent" (OER)—which accounts for a massive 30% of the CPI—is finally beginning to roll over as old lease terms expire and new, lower terms are reached.

The most telling data point, however, is the Producer Price Index (PPI) for Finished Goods. This index has increased by only 1.3% since June 2022. That is an annualized rate of ~0.04% over 32 months. In plain English: Producer prices are dead flat.

The Growth Engine is Sputtering

If inflation is fading, why aren"t we celebrating? Because the same forces bringing prices down—slowing consumer demand and business uncertainty—are threatening the "E" in our P/E ratios.

The Atlanta Fed"s GDPNow model is currently forecasting Q1 2025 growth at -1.8%. While models aren"t destiny, the real-world evidence from our Circle of Competence (Housing) is hard to ignore.

Homebuilders like Lennar (LEN) are seeing the impact of high interest rates and falling consumer confidence first-hand. When housing starts weaken, the ripple effect through the economy is profound.

"While demand remains strong, persistently higher interest rates and inflation… made it increasingly difficult for consumers to access homeownership," — Stuart Miller, Lennar CEO.

Uncertainty is a Tax on Investment

Business capital spending has been stagnant. Why? Because uncertainty is the enemy of allocation. When the "ground rules" of trade (tariffs) are in flux, CEOs hit the pause button on large investment decisions. Jerome Powell used the word "uncertain" 16 times in a single week—a clear sign that the Fed is flying with limited visibility.

The silver lining? Market liquidity remains healthy. Banks are sitting on $3 trillion in reserves, and credit spreads are low. The system is well-capitalized enough to absorb a slowdown—for now.

Putting it All Together

To navigate the coming months, we must ignore the noise of past inflation shocks and focus on growth risks. Specifically, we should be watching for a downward revision in S&P 500 earnings estimates. While the consensus is currently around $275 per share, I believe a number between $250 and $260 is a more realistic outcome given the headwinds of falling consumer spend and slowing business investment.

Markets are currently not priced for that reality. Patience remains our greatest asset.