PRICE WARS AND TRANSITORY YELLENS
EDU DDA Jun. 3, 2025
Summary: In the wake of suspiciously weak American consumer price data for March and April, first Switzerland reported a negative, deflationary May CPI. It was quickly followed by European flash estimates also for May which unexpectedly undershot the ECB. Right when prices were supposed to be taking off, they are not. It is somewhat reminiscent of 2017’s wireless price war. Not specifically the war itself, rather the conditions which led up to it then came afterward. What Verizon and Janet Yellen can tell us about the mysteriously weak price changes in the middle of 2025.
THERE ARE MORE THAN A FEW HINTS OF 2017 HERE IN 2025’S CPIs AND WHATNOT
The day’s spotlight in stocks went to JOLTS when it should have stuck to the inflation narrative being further busted up. The Bureau of Economic Analysis had already reported late last week how, using the Fed’s preferred measure, American consumer prices are verging toward undershooting after two straight months of basically no changes – despite tariff pressures being evident in March and April.
Core rates sunk to their lowest annual change of the cycle so far even after prices had jumped at the start of the year - and for three months. The deflators didn’t even need to extricate themselves from fake shelter figures to demonstrate falling pressures. While that sounds like a huge positive, it’s actually the opposite as Janet Yellen would tell you from her own experience (if she is in the mood for being honest like in 2014, as discussed yesterday).
Today delivered a Swiss negative and a “surprise” European undershoot. Like the confounding disinflation of, say, 2017, these latest developments are being cast in the same way simply because central bankers aren’t quite sure what to make of them. Thus, the comparison to eight years ago is apt in several ways.
Faltering price changes are therefore an economic negative yet interest rate positive, not that anything will be taken that way among mainstream commentary firmly affixed to “bond vigilantism” by narrative. More importantly, they illuminate an entire global economy badly struggling in the wake not of tariffs, but fragile economy further disturbed by a serious bout of old-fashioned monetary deflation.
Should we really be shocked that consumer prices are conforming to those and not Jay Powell or Martin Schlegel?
A very different transitory that actually wasn’t
For Economists who were unable to practice economics, consumer prices were everything in the second half of 2010s. It wasn’t really about inflation or any impact on consumers and businesses, rather the desperate need among policymakers to corroborate, to prove the success of their models and programs; to give QE a positive send-off into the annals of history.
It never happened.
Not that officials didn’t keep calling for it. What they theorized was as QE aided the economy’s slow, conspicuously torturous “recovery” (Stan Fischer’s confession discussed yesterday) it would eventually close the so-called output gap and fully heal the labor market in the process. Where it came to the latter, the recovering economy would eventually reach full employment (initially forecast by the FOMC for 2015, only to be pushed back year after year after), the point on the Phillips Curve which indicates there is no more spare slack of workers who had been idled by economic circumstances rather than any fault of their own (as Economists repeatedly claimed throughout the period).
Once the labor market hit max employment, wage rates would then shoot up leading to higher consumer prices as companies passed along those rising labor costs to their customers. So, you can see the train of thought from the Fed’s perspective: QE fixes the economy and we know it did once the labor market reaches that inflationary full employment spot and the world sees it in the CPI and PCE deflator.
This is why throughout the middle and later 2010s policymakers kept on forecasting higher “inflation”, expecting that all of it worked even if it took longer than originally planned to get there. As previously stated, it simply never happened. With the months and then years rolling by with no “inflation” as predicted, first Ben Bernanke then Yellen began to claim this confounding disinflation was only “transitory.”
OK, it didn’t happen in 2015 or 2016, surely that unexpected disinflation would disappear by 2017. Or 2018. Maybe 2019.
The first time the Fed experimented with the phase was for the opposite condition as in 2021 when consumer price rates actually were transitory (the phase shift of the supply shock). Silent Depession disinflation was not. In the parlance of Economists, “inflation” kept “undershooting” central bank targets (globally synchronized) much to their consternation and embarrassment. An entire decade’s worth.
A lot of this finally came to a head in 2017, during Yellen’s final year as Fed Chair. Even though the Fed had restarted its rate hikes in December 2016 following a year-long hiatus (for disinflationary weak economy, or Euro$3), consumer prices failed to come along. One reason why was wireless telecom carriers who engaged in a price war which dented the CPI and deflators, clearly antagonizing desperate officials who quickly sought to dismiss the “inconvenient” Verizon battle.
The unlimited war
When Federal Reserve officials first started to mention wireless network data plans as a possible explanation for a fifth year (2017) of “transitory” factors holding back consumer price inflation, it seemed a bit transparent. One of the reasons for immediately doubting their sincerity was the history of that particular piece of the CPI (or PCE Deflator). To begin with, the unlimited data plan wars that kicked off with Verizon’s entry into them wasn’t all that much of a change for the industry (it might seem weird nowadays, yet before 2017 unlimited plans were not as widespread so when this happened it was indeed a shock).
It seemed a little weird to be suggesting falling wireless telephone prices (the category of the CPI carrying the carriers’ various products and services) were a temporary inconvenience when wireless telephone prices have been falling since they were first added to the index in 1997. It’s kind of what they’ve done. They may drop at times at varying rates, but by and large their direction is consistently downward, almost always a drag on the overall headline inflation rate.
Whenever analyzing monetary factors through inflation, we begin with a basic problem. Economists of generations following the Great Depression have an intense fear of deflation that didn’t uniformly exist before it. The Great Collapse starting in 1929 was a shock, to be sure, but not all price drags are monetary in origin.
In fact, the successful practice of capitalism should always lead in the direction of lower consumer prices. That’s the beauty of it, where via the right combination (the invisible hand) of labor and capital (machines or intellectual property, not cash) we consumers are able to buy more for less – productive disinflation not deflation. It’s exactly why the CPI sub-index for Wireless Telephone Services debuted for December 1997 at 100 and here in 2025 is just under 47.
There are other forms of deflation which aren’t so pleasant however much they may seem that way on the surface. Monetary deflation is the worst, the insipid version that devastated the global economy in the early thirties and then wouldn’t really let go until Bretton Woods in 1944 (long after the world had spiraled into the true abyss of WWII). Briefly, monetary deflation is where a shortage of money is so spectacular regular folks as well as businesses are forced to liquidate anything and everything in order to raise cash (oftentimes so it can be further hoarded).
In the worst of the worst cases, like the early thirties, the prices of just about every good and commodity will plummet at that point, destroying real capital (businesses) as output prices fall below production costs, essentially shrinking the economy on the all-important supply side.
Monetary deflation need not be so extreme, however. In what might be more fairly called macro deflation, an economic downturn might force businesses to cut prices on excess inventory, for example, or what becomes surplus production those businesses didn’t anticipate before the cycle turned. And it can be all relative, too. A firm that plans for 10% growth because it expects 5% GDP expansion will find itself in a similar bind should 2% GDP leave it with but 4% revenue.
For wireless telephone services, the trend in prices does seem more than a little like what I just described above. After steadily declining in the late nineties in what was surely productive disinflation (the introduction phase leading to widespread adoption), wireless plan prices stabilized throughout the growth period in the middle 2000’s. It wasn’t until the second half of 2009, just after the Great “Recession” was at its worst, prices began falling all over again.
Since then, what had been the dominant feature of the decade which followed? There had been a perverse trend where the lack of income growth and jobs is really all that mattered (which is why Economists try so very hard to come up with reasons why they don’t; see: unemployment rate). You look at something like retail sales, GDP, whatever, and the difference is immediately obvious for all these unit roots:
It sure looks a lot like the economy simply shrunk. What might happen to, say, wireless data providers trying to operate profitably during this shrunken portion? It stands to reason that competition in that space would be even more dramatic than at any other point, which would lead them toward outsized price sensitivity (driven largely by those macro constraints on their customers and prospective customers) well over and above productive disinflation competition.
AT&T, Sprint, T-Mobile, and Verizon may not have been trying to literally liquidate inventory, but in one meaningful sense that’s just what they had been doing to the point the price cutting (unlimited wireless plans were suddenly being made available everywhere, the same as a price cut) was enough to dent the CPI to the public chagrin of Ms. Yellen and her FOMC committee which attempted to scapegoat years of unexpected disinflation on telecom carriers.
It wasn’t the productive adoption of a new technology coming into its own, and these price wars sure weren’t consistent with a robust recovery reaching full employment to let central bankers finally off the hook for their decade-long failure. The lady Yellen doth protested Verizon too much.
Undershooting 2020s
Like interest rates, consumer price rates were never supposed to go back to the 2010s here in the 2020s. They said it was impossible, there would be no undershooting price risk. In fact, officials have spent the last half decade constantly and deliberately focused on what they see of constant “inflation” risks. There are similarities to the 2010s, too, starting with the desire to validate their early pandemic policies which, they say, created a full employment recovery.
In fact, policymakers and Economists have taken full employment far beyond it therefore the constant “inflation” focus (red hot labor market would lead to a constant inflation threat according to mainstream dogma). This doesn’t stand up to scrutiny, either, since consumer price changes bear zero correlation with the unemployment rate or any other employment data. “Inflation” was very obviously limited to a singular phase shift which ended in the middle of 2022.
As far as the labor market, the full context of the data shows there was never a recovery let alone something like going beyond full employment – not unlike the 2010s.
However, given that prior example, you can see the one reason why policymakers haven’t been able to give up on inflation and the Phillips Curve. Undershooting here in 2025 would again completely undermine the narrative of the past half decade.
Yet, we felt a brush of undershooting as early as last summer. Consumer prices in the US dropped down toward the Fed’s target while those in places like Canada and Europe went well underneath theirs. Global officials were only “saved” temporarily by the artificial high beginning late last year as transitory demand to beat tariffs lifted prices just enough to spark another mini-inflation panic.
Tariffs and trade wars were supposed to amplify it when, on the contrary, the opposite is coming out of so many price measures. I mentioned the US metrics, now Switzerland which today reported a negative annual price change for the first time since March 2021. And like Yellen in 2017, SNB officials are doing their best to downplay the significance of this clear undershooting:
The Swiss National Bank won’t be distracted by monthly inflation numbers, according to a senior official.
“We’re focused on the medium term,” Governing Board member Petra Tschudin said. Referring to a report earlier in the day that showed that annual consumer prices fell below zero for the first time since the pandemic, she highlighted that “this is just one data point.”
See, that’s just what Yellen was trying to claim nearly a decade ago: Verizon’s war was only one monthly thing, and once it worked itself out, she said, the inflation would then show up. It never did because there was no economic reason for it to; the economy itself wasn’t what Yellen said and it isn’t today what SNB or any of them claim.
For Switzerland, this isn’t “just one data point.” Consumer price rates have been decelerating toward zero - now below it - for a year already. According to SNB’s initial forecasts, the Swiss CPI should have leveled off at around 1.5% over twelve months ago. When it didn’t, the rate cuts were started which were meant to “help” the economy settle on the central bank target.
They didn’t work just like QE and zero interest rates in the 2010s never lifted off the labor market or consumer prices. As recently as December 2024 when the SNB cut by fifty, the whole point of the upsizing was to keep prices from doing what they just did. Policymakers said that a large rate reduction had lowered the chances of seeing outright deflation, which Switzerland just got anyway.
Therefore, downplay the failure even as it is multidimensional (rate cuts didn’t work; tariffs aren’t being inflationary; the labor market can’t be red hot; etc.)
The undershooting doesn’t only apply to May, it’s been coming this whole cycle and it isn’t going to just disappear especially with the franc as persistently “strong” as it has been – like swap spreads, CHF barely budged from its April deflation high, coming close to it in yesterday’s trading.
Why is CHF so “strong” in the first place?
Deflationary potential not just for Switzerland, and also everywhere else, the flight to safety there. Why flee for safety? Same reason Verizon felt compelled to start the unlimited data plan wars.
Lagarde’s way
Undershooting came back to Europe proper, as well. Consumer price rates last summer had fallen below 2% and were poised to keep going until the tariff business scrambled everything. Now, when trade wars are supposed to be spiking prices, they are coming up short in all these different places and, like Switzerland, these numbers are for May.
Europe’s CPI was flat last month which brought the annual rate down to 1.93% and once more below the ECB threshold. That was well under expectations as everyone from Economists to central bankers (same thing) remain convinced tariffs are going to push price rates upward by some big amount.
And they are likely to raise them, just not that far or just yet. Even when this does happen, a moderate acceleration in price changes, it won’t be “inflation” or inflation. It will instead be 2017 and 2018, moderate variations in disinflation or more. That’s the signal from March, April and now May consumer prices are sending from all these various places around the globe.
Be it Swiss negatives, European undershooting, or American disinflation, the fact all the price changes are confounding expectations, like 2017, shows how fragile, weak the overall economy is (not to mention the outright monetary deflation in April and signs pointing to a good chance for more). What that means is, as 2017, it will be very difficult for those businesses experiencing price pressures to pass costs along to other businesses in the supply chain or consumers.
Any acceleration in price rates will definitely be, yes, transitory, putting the term to its proper use again.
This clear lack of “inflation” at the start of the tariff shock is evidence there won’t be much of it further on, either, because any price changes that do get shoved along will only make everything worse to the point that, like Verizon, eventually businesses will be competing for customers not workers.
The latter was supposed to have confirmed QE’s 2010s belated success when the former actually put the final nail in its coffin, even if the public by and large was never clued in on this. The markets were…and then some. That’s why bond curves flattened in 2017, fighting against Yellen’s rate hikes, only to then invert by the end of 2018 and ending the whole fantasy under Powell.
There is also more than a fair share of globally synchronized here, even if that doesn’t mean exactly the same CPI rates at the same time. The overriding conditions are more than familiar from each perspective, and therefore also why central banks – aside from the Fed – are behaving in the way they have. The ECB is going to cut again soon, and then several times more afterward.
SNB will almost certainly be at zero in a couple weeks with a fair shot of seeing negative rates especially if the franc keeps rising again like it has more recently.
Deflationary signals are sprouting up in more and more places right when “inflation” was said to be retaking center stage. It isn’t an exact parallel to 2017, though the Verizon war is illustrative of the same concepts and processes we’re getting in 2025. There is no red-hot labor market and the economy never recovered.
Just take a look at the OECD’s warning on lack of global productive investment, also published today. Another example of shrunken economics where recoveries were said to be.
