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Soft Data, Strong Indicators: Inflation To Spike?
The Macro Institute's Weekly Economic Primer
The Macro Institute
May 19, 2025
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Quiet week? Not so fast. This is usually one of the slower weeks on the data front, but don’t let the light calendar fool you.
We’ll get the Conference Board’s Leading Economic Index today and the flash Manufacturing and Services PMIs from S&P Global (Markit) on Thursday. There’s another release this week we might normally brush over, but these aren’t normal times: the Kansas City Fed PMI, is also out Thursday.
Last week, both the Philly Fed and Empire State indices showed a jump in their Prices Paid components, which are key inflation proxies and joined a long list of soft data series calling for a spike in inflation. And if we set aside the madness of 2021–22, these levels are rare. That’s our cue to pay attention.
Prices Paid is an early-stage inflation indicator. Think upstream in the supply chain. It often moves before broader inflation gauges like CPI catch on. So, while the KC Fed PMI usually flies under the radar, this week it could offer a sneak peek at where inflation is headed next.
The bottom line? This is a low volume data week, but certainly not low stakes. Keep your eyes on Thursday’s KC Fed release, especially the Prices Paid reading.
The Macro Week In Review
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The Macro Week Ahead
🗽 U.S. Debt Downgrade
In today’s fast-moving world you can’t leave your Bloomberg terminal for too long without missing something critical. Late on Friday, Moody’s announced it was downgrading the U.S. credit rating from Aaa to Aa1 citing high debt levels, growing interest costs, and widening deficits. This move by Moody’s follows downgrades from Fitch, which lowered its rating on the status of U.S. debt in 2023, and S&P in 2011.
The Federal Debt-to-GDP ratio sits at 123%. This compares to 57% in 2000 and 35% in 1980. The deficit is running at $2 trillion per year, and price tags for Medicare, Social Security, and Defense combining for $4 trillion in annual expenditures. There’s little flexibility or political will to substantially reduce these major line items, which explains why interest payments on U.S. debt alone comes in around $1 trillion per year.
The unsustainable rise in government expenditures and fiscal cliffs has been an issue politicians and investors have been contending with consistently since the global financial crisis. So, this downgrade from Moody’s hardly comes as a surprise, and frankly, probably arrived much too late.
With the U.S. government needing to refinance roughly $7 trillion to $9 trillion of debt in 2025, it’s imperative that shorter-term yields do not rise significantly. Issuing debt at higher rates would put even more pressure on the deficit through even higher interest expenses. On Friday, the yield on the 2-Year U.S. government bond rose from 3.92% to 3.99% following the double-whammy of hot inflation expectations and then the credit rating downgrade.
👊 Squaring the Soft Data vs. Hard Data
The Bloomberg Economic Surprise Index has gyrated between slightly positive and negative territory since March, meaning a relatively even balance between above and below consensus readings from the weekly economic data. Surveys and business cycle indicators have been the primary sources of negative surprises. Last week, the NFIB’s survey on Capital Expenditure Plans for April hit 18, which is in line with the lows of the pandemic. On the positive side, bearish survey readings have been partially offset by bullish data from the industrial sector and labor market.
Last week, our first glimpse into economic activity in May arrived with the regional PMIs from New York (Empire) and Philly. The headline numbers and New Orders component for each bounced slightly higher following contractionary readings in April. These regional demand figures are going to be extremely choppy in the near term as the supply chain digests the pre-buying activity ahead of tariffs, the embargo-like tariff rates in April, and potentially another inventory buildup following the 90-day tariff “pause”.
As we highlight in the chart above, the Prices Paid component of these two regional PMIs speak to a channel facing significantly higher prices with Philly readings well on their way to peak 2021 levels. Survey respondents suggest that 86% believe that competitors will begin raising prices in the next 2 months with U.S. consumers paying 3.8% higher prices over the next year. This brings us to inflation readings from last week …
CPI for the month of April was 2.3% y/y, which represents a 10-bps decline from the prior month. Core CPI remained at 2.8% y/y. PPI Final Demand was 2.4% vs. 2.7% in the prior month. It will take time for the implementation of tariffs to work through the supply chain as companies offload an approximately 2-month stock of pre-tariff inventory according to the Philly Fed.
📉 A Decline in Leading Indicators?
The Conference Board’s LEI Index for April is out today at 10 am with expectations for a 0.9% month-over-month decline. We can back into the index’s components through trends in the major components such as the S&P 500, New Orders, Building Permits, and Initial Claims, so it’s not all that predictive, and consensus estimates for a decline are reasonable.
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