Every ceiling, when reached, becomes a floor upon which one walks as a matter of course and prescriptive right. – Aldous Huxley
Every ceiling, when reached, becomes a floor upon which one walks as a matter of course and prescriptive right.
Core CPI (Consumer Price Index) no longer behaves the way investors were trained to expect during the post-Global Financial Crisis (GFC) decade. Inflation averaged 2.8% from 1990 through 2007, fell to 1.9% from 2010 through 2019 and has averaged 4.1% since 2021. The 2010s were an unusually soft inflation regime that shaped expectations across markets and policy. The change in inflation regime has exposed how heavily those expectations were anchored to a period that now looks exceptional.
Our chart this week measures year-over-year core CPI relative to a 2.5% threshold, which cleanly separates two very different inflation regimes. Core CPI did not exceed 2.5% in a single month from January 2010 through December 2019, producing a 120-month stretch below that line. Since 2021, core CPI has been above 2.5% in 57 out of 63 months, including a continuous 56-month run from April 2021 through December 2025. What once served as the ceiling for inflation now marks the floor.
The old regime was supported by conditions that kept nominal pressures unusually subdued. Wage growth slowed to 2.8% during the 2010s after averaging 4.4% from 1990 through 2007, and it has since risen to 4.9%. Unit labor costs followed a similar pattern, averaging 1.3% during the post-GFC decade versus 1.7% before the GFC and 3.0% since 2021. During the post-GFC decade, companies operated in an environment of restrained compensation growth and contained labor-cost pressure.
Imported disinflation also played an important role. Import prices excluding fuel averaged 1.7% from 1990 through 2007, fell to just 0.4% from 2010 through 2019, and they have averaged 2.1% since 2021. The post-GFC decade benefited from an unusually strong external disinflationary impulse tied to a global production system organized around inexpensive labor in Asia and supported by a stable global trade environment that investors assumed would persist. Inexpensive imported goods helped keep inflation unusually low.
The post-COVID-19 break ran deeper than a temporary inflation spike because it changed the conditions that supported the old regime. Businesses became more willing to pass through higher costs, households became more attentive to inflation after years of price stability, and supply chains lost the sense of permanence that underpinned the prior production model. Fiscal policy loosened, labor supply tightened in ways that reduced the availability of experienced workers, and geopolitical instability became a recurring feature of the backdrop. The world that emerged carries more friction, more redundancy and greater exposure to ongoing disruptions.
Viewed in this context, the decline from 6% core inflation in 2022 to 2.6% today looks like normalization only if the peak is the only point of reference. The more relevant comparison is between a period in which 2.5% functioned as a ceiling and one in which it functions as a floor. The central error in the current inflation debate is treating the post-GFC decade as the baseline that the economy naturally returns to, even though that period increasingly looks like the exception. The baseline has shifted, but market expectations remain anchored to the old inflation regime.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
