The Dividend Cafe - When Lower Inflation Hurts

Episode Date: February 20, 2026

Today's Post - https://bahnsen.co/4tNvJGE David Bahnsen opens Dividend Cafe after a volatile week marked by a weaker-than-expected GDP report and a Supreme Court ruling striking down President Trump��s tariff rationale under the Economic Emergency Act (with a deeper tariff discussion coming Monday). His core thesis: disinflation is likely in 2026—and it may not feel positive. He clarifies the difference between inflation (rising prices), disinflation (slower price increases), and deflation (falling prices). Bond markets are signaling softer expectations, with the 10-year Treasury near 4.07% and five-year inflation breakevens around 2.4%, suggesting modest real growth ahead. Recent GDP registered about 1.4% annualized, distorted in part by a government shutdown, while core PCE inflation is roughly 3% year-over-year versus 2.9% a year ago. Bahnsen expects services-driven disinflation, particularly as rent measures catch up to real-time data. However, that may not improve affordability given tight housing inventory and a frozen resale market. He also warns that business investment is overly concentrated in AI and data centers—echoing the fracking-era CapEx surge—while broader investment remains subdued. Risks to growth include a weak labor market with low hiring, a personal saving rate near 3.4% (raising the chance tax refunds rebuild savings instead of fuel spending), and muted bank lending despite lower rates. 00:00 A wild news week 01:48 Cutting through economic spin 03:23 Why 2026 disinflation may disappoint 04:36 Bond market signals 07:16 GDP and data distortions 10:49 Services-led disinflation 14:05 Concentrated CapEx risk 16:38 Labor, savings, and lending 20:09 Tariffs and demand drag 22:24 What to watch next Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to the Dividend Cafe. I am your host, David Bonson, and I can tell you that in what is getting closer and closer to 20 years of doing this weekly Friday commentary, I don't think we've had three Fridays where so much happened from the time. I had already begun writing it on Thursday to the time that I was in the midst of writing it Friday morning and even throughout the period of the actual writing Friday morning. Just in terms of newsworthy events, and ironically, some of them this week being relevant to the subject of today's Dividendon Cafe, I was writing already about disinflationary expectations and the paradox of, fact that I see disinflation coming in a negative way, in a not constructive way, in a politically disadvantageous way this year. And there's a sort of economic and investor thing around that.

And then as I was in the midst of writing Friday morning, the GDP report came out and was substantially below expectations for a variety of reasons. And then in the midst of me, writing, the Supreme Court ruling long awaited, came out that did indeed strike down President Trump's rationale for tariffs that is being used for a significant portion, this so-called Economic Emergency Act. So I am going to be really focusing on the Supreme Court action and the expectation for tariffs because of it in the Monday Dividing Cafe. But today, I really want to talk about the state of the U.S. economy.

I want to talk about price expectations. I want to talk about a GDP number. And I desperately want to make the case for us separating headline data, month-by-month data, political spin, the way in which numbers fit into narratives for either side of the aisle. I don't care right now about that at all. It's irrelevant what side we're talking about. I want to talk about how for my job. and the way I communicate to you, the way in which this flows to a particularly politically advantageous set here and there is not correlated to the way in which I present the data

and the way I have to unpack nuances and caveats in the data that are necessary to understand economically. So there is a sense in which today's thesis, which I'm going to just read you a simple sentence and then spend some time here unpacking, this sentence is perhaps the most politically confused thing I can say. And I am totally fine with that. I do not write anything in Diven Cafe to help reduce something to a soundbite or a political commercial or even make predictions about how a might play out in the political sphere. I want this to have the necessary economic nuance behind it. And what I want to say is that I think disinflation is coming in 2026 and I don't think people are going to like it. So what I mean by disinflation, of course, is a lowering of the inflation rate, not a lowering of prices, which is deflation, negative price increase. So a price was 100,

and then it goes to 99. That is a negative 1% inflation rate, what we call deflation. A price goes from 100 to 103. That's a 3% inflation rate. And the next year, it goes up 2% instead of 3%. So it has gone higher than 103, but at a lower rate than what it had gone up the year before, that is called disinflation. And this basic economic vocabulary of inflation versus disinflation versus deflation are actually vocabulary terms I would suggest if you ever run for office or decide to be a reporter that you look up because I don't think very many people in those two respective professions have bothered to understand the difference.

But where we are, first of all, I want to come back to a very important investment, invest, or financial markets, rule of thumb, which is that the bond market delivers price signals and it does it better than almost anything.

And we right now are sitting at a 10-year bond yield of 4.07% down about 10 basis points since the year began, down about 50 basis points from where we were a year ago. And it is my conviction.

that the long end of the yield curve, the longer dated risk-free rate, what you can loan your money to the U.S. government for with a 100% chance of getting paid back represents this expectation for nominal GDP growth. And that because in our beautiful, evolved, wise, capital markets, we created a concoction called TIPS, Treasury, Inflation, Protected, Seasons. securities whereby U.S. government bonds are issued, securitized, distributed into the marketplace for purchase by economic actors that will then offer a lower yield but pay the rate of inflation over that period of time. We get to deconstruct what a treasury yield represents. the sum of parts that involves the tip spread, so that is the actual nominal bond yield of a treasury

minus what the tip rate would be, tells you what the inflation expectations are. There is a chart in Dividendoncafe.com that will put up on the screen right now of the five-year inflation break-even that you can see has basically sat there somewhere around 2.4%. And it's gone in between 2.2 and 2.6 for quite some time. All right? So that if you are seeing a four percentage treasury with 2.4 percentish tip spreads, then you have a 1.5 to 1.8 expectation of real economic growth. If you get a lower inflation expectation and the same bond yield,

you're getting higher real growth expectation. And if you get a higher bond yield and the same inflation tip spread, you're getting a higher real growth expectation. But that primarily what we have seen is an underwhelming expectation for real growth. And this, of course, becomes disinflationary for reasons we will soon talk about. At the end of the day, I don't care about this for political reasons, as I've said, but I want to give you a context of what has happened month after month after month, after month, after month and is going to continue to happen, and I'm going to resist the temptation to cover it in this manner. The CPI number goes up, 0.1% more than expected, and a certain segment of people

dunk on the other side. It goes down 0.1.2 more than expected that one side dunks on the other side. A GDP number comes out. It was robust for Q3, released in Q4, suggesting over 4% annualized growth, and you got a bunch of people, some of whom are supposed to know better, saying, oh, my gosh, we're growing like crazy. This economy is on fire. Then now today, you got a lower than expected number, 1.4% annualized. And that is going to end up creating a much lower annual GDP number. But then some will say, and they're not wrong. I'll talk about this more in the Dividend Cafe on Monday, that there's about a 1%

difference annualized for the quarter from the government shutdown, it would have been maybe about 2.5 percent, 2.4, 2.5. That's true, yet you still saw downward pressure in business investment and consumption relative to expectation, but here's the thing. If you consider that government number an anomaly and a skew of the reality, why didn't you see a skew of reality last quarter? when clearly the net export number was distorted by repunishment in tariffs, excuse me, in imports from people that had been front-running tariffs before. We knew that anomaly was there, and some just chose to ignore it. I recognize there was an anomaly on the government side this quarter too,

but no matter how you slice it, you're ending up at a real GDP number that is lower than it had been the year before. And by the way, with the PCE number, the personal consumption expenditures, you're ending up with a total year over year core number of 3% and it was 2.9 the year before. So you basically have less economic growth over the last year and a slightly higher price level. And now I'm about to talk about my expectation for disinflation. And so people can go, oh, well, now you're about to give us more spin. And you're suggesting tariffs are good, the administration's policies are good, everything's good, and you're expecting lower inflation. Well, first of all, if you think that, you've never listened to me.

I call balls and strikes about what parts of administration policy I like, what parts I don't like. And certainly the area of economic policy from this administration I've been most critical of, because it is the area I'm most critical of, more than pretty much every other area combined is tariffs. So I'm not cheerleading for tariffs. I'm about to make a negative point of economic impact, but argue that it is disinflationary if you will hear me out. So why, first of all, if we eliminate tariff considerations or an economic outlook, and I just say, I think you're going to see disinflation in 26, and I don't think it's necessarily going to be great economically, even if the expected people will come out and say, this is good for us

politically or this is bad politically or you know, you're going to see all that. normal stuff. If you just leave it all as it is, I strongly believe goods inflation is picked up. It was about 0% year over a year, and it is now running about 1.7, but you're getting disinflation that outweighs it, and it's coming more so, in my opinion, on the services side, because of the rents and the rent growth, and the fact that finally we're seeing, and I am again predicting, and I've been way early in this, but right now feel it is almost inevitable that the rent growth data is going to have caught up to reality on the ground that you can see in so many of the real-time measurements, whether you want to look at the Redfin rental tracker,

the National Rent Report for apartment lists, which I look at religiously, zero's observed rent index, co-stars got very good monthly data. that are much more real time than the 12-month lag you get in rent growth from the BLS and the CPI data. But there's complexities in this. What is known, though, is that it's 35% of headline CPI. It's 40% of core CPI. And so downward pressure on that number to catch up to the fact that there just simply isn't room for rent growth to continue right now, is going to disinflate that number.

But I don't see that despite what will happen with political spin as a constructive thing economically. Because first of all, I don't think it's actually connected to what we want to be the case of better housing affordability. We are right now at the remember rents and home prices for sale, inventory for sale. These are somewhat different. And CPI uses this convoluted thing called owner's equivalent rent to try to capture it. But my point being, I have an economic agenda to see greater home affordability in the economy. I think it's important to unfreeze the housing market. And I think a lot of people know at this point that what is frozen it is the sellers,

would be sellers having an advantageous mortgage rate that they don't want to replace. And there is very low inventory, about four months worth of supply on market. Inventory did not come up enough in 25 to come close to rebalancing the marketplace. And so that becomes a big issue on affordability that I think can really only come down by home prices, sticker prices coming down. And we'll let market forces bear some of that out. There probably will end up being some bad policy ideas on the way. And maybe there could be some good policy ideas too.

But my point is that if people still feel like prices are high, if they still feel like certain prices are going higher and the total inflation data is coming down point one here, point one there because of the mathematical factor I talk about of the way we measure rents, I don't see how that's a particularly advantageous thing to anyone, but you could call that for what it is mathematically disinflation if the rate of inflation is going down a bit here, a bit there. But the challenge I would suggest is that for real GDP growth,

that it's sustainable and leads to higher standard of living for people, you need better capital expenditures driving this business investment, driving economic productivity. Right now, all of that. All CAPEX is in data center. All of it. And it very much reminds me of the fracking story from 2010 to 2014, where you would have had negative CAPEX. I mean, just no business investment after the financial crisis, if it weren't for the oil and gas renaissance. And it mattered. It added to GDP growth. Data Center builds are adding to GDP growth.

It would be even worse if that wasn't there. But it can't carry the whole load on its own. You need better diversification economy geographically and sector diversification. There's also inevitably going to be a pause or downward pressure on some of that alone. but we just had very stunted economic growth for a long, long time post-crisis. I think it's still continued to this day. And part of the non-residential fixed investment thing post-crisis was that fracking was all there was.

And right now, data centers all there is. And maybe I'll do a dividend cafe in the future talking about more parallels between the two, the risk of overinvestment, the risk of malinvestment, the risk of leverage. But in the meantime, I guess what I would say is we, we. We need to see this greater capital expenditures. And the big, beautiful bill act, here's me complimenting some parts of administration policy, has done what it can to introduce that. There's great supply side incentives to see more of it.

Just don't see it yet. And maybe it's coming. And I wrote very humbly and agnosticly about this in our annual white paper, our 2026 preview, that I don't know how this will play out. But, you know, here we are looking at data of recent times, and we just simply don't see the capital expenditures that I would have thought you would be see materializing by now. But there's a lot of time left. But my point is to avoid some of the disinflationary pressures, I think you see, you have

to see greater capital expenditures. And what is it that could go from just the sort of steady state disinflation? Yeah, some prices are going higher and the rent measurements are going lower in a way that brings the overall inflation rate down. So it's more stagnation, not helping economic data much, not helping economic productivity or real GDP growth. My friends, I think that you have some disinflationary concerns that are becoming more likely, more probable. They're not assured, but the weight of evidence would, the sort of asymmetry, I think, on risk-reward here is unattractive. And what I'm referring to, I'm going to give you a couple things to take home.

First of all, the overall, and again, I just want to repeat what I'm talking about, that disinflation thesis, I think maybe more right than I've suggested, but I think is more troublesome even than I've laid out so far. The labor market, okay? I'm totally open to the idea that it doesn't get a lot worse. That would be a great outcome if it doesn't. But I'm not really open to much case that it's going to get a lot better. and what you see is a hiring freeze that has probably been accompanied mostly by a firing freeze, but that's very hard to sustain. Usually, low, low, low levels of hiring for extended period do foreshadow eventual periods of firing and an increase on the unemployment rate coming. But I really, really hope and pray that doesn't happen. But I don't see the unemployment rate dropping to 3.5%.

I think four and a half in higher is much more likely. that seems rather indisputable in terms of the asymmetry of that risk or reward. And when you see a lack of wage growth, when you see a lack of hiring, that's disinflationary and for all the wrong reasons. I think that you have a personal saving rate problem. Dr. Lacey Hunt wrote a piece on this that was really helpful for me. And Lacey, for those of you know, is one of my favorite living economists. I have the chart of the week here in Dividing Cafe.

Actually, look, we'll put it up now. Usually we have the chart of the week at the end, but let me put up the chart of the personal saving rate so you can see just visually what Lacey's referring to. Because one of the big arguments has been that big tax refunds are coming, and that's true. Higher than expected tax refunds are coming because of the change in Big Beautiful Bill relative to withholding tables that we started the year at. It's one time. It isn't super material, but it could theoretically have led to a big increase in some activity.

But if the personal saving rate is, you know, it's a personal saving rate. this depressed, which it's been, and you have seen a big disconnect in expenditures going higher than income growth. It does mean people have depleted savings to kind of live out some of this higher spending. And at this level of a saving rate, an overstated level at 3.4%. You're kind of basically at the lowest we've been post-crisis. Lacey's thesis, which I'm pretty sympathetic to, is that some of these tax refunds are going to come to replenish savings, not grow spending, not grow economic activity. So back to the kind of point we're making here,

you have a saving rate issue, you have a labor market issue, and I think that then you have questions about overall lending, one of just bank activity. And if you are not seeing higher levels, let's say easier financial condition, which is, I think, very likely that we've already seen a Fed funds rate that's come down and the 2025 bank lending did not go up. Monetary conditions have not loosened. That becomes disinflationary as well.

And of course, in more extreme cases, becomes deflationary. But then finally, the underlying point I'll close with, which brings in the Supreme Court ruling today, the economic growth issue from today and the whole subject today is dividend cafe. I wrote back in I believe August in the dividend cafe that the tariffs saw price increases at first in certain items, except for an items where importers couldn't pass along higher prices, but then ultimately if it constrained total trade, if it constrained demand, if it constrained capital investment and productivity, then it ended up becoming disinflationary. And I would suggest that that is. is a case that we are seeing play out right now.

Could it get worse? Yes. Could it get better? They've made a lot of exceptions, a lot of carveouts. They've already changed their mind on a lot of tariffs. That, I say, is all a positive thing. And then the ruling today has the Supreme Court possibly just done the biggest favor for the administration they could have comprehended doing?

That would be my theory of the case, but we have to evaluate more what the response is going to end up being in workarounds and shifting and rationale and whatnot. All things being equal, I think this economic notion of tariffs leading to some price increases and then having a disinflationary impact in a negative way for contracted economic activity, this becomes a more base case for 2026. still praying for CAPEX to come to the rescue, for business investment. And the reason I diagnose that as the solution is because I'm a supply cider through and through.

And I believe that greater incentives to produce lead to greater activity that leads to the economic activity that's sustainable and productive. And that is what the need of the hour is. But disinflationary forces right now may very well feel like a good, thing politically in a headline, but I think we'll end up in 26 proving to be counterproductive to what we care about far more, which is actual sustainable economic growth. I bit off a lot here in a different cafe. We've talked about over-reliance on one sector's capital expenditures, the AI data sector story. We've talked about the complexity of how we think

about inflation and prices, and we've talked about a little bit more mature perspective on where economic growth is. Nothing I'm saying here is predictive to political ramifications. All of it is to suggest that the economic outlook for 26 is different than the way in which it gets read through media, social media, online banter, and definitely political lenses. And my view right now is you are going to see disinflation in 26 and not for reasons anybody's going to like. Thanks for listening. Thanks for watching. and thank you for reading the Dividing Cafe. I will be with you Monday for a special dividend cafe on the Supreme Court ruling and the fate of tariffs. And in the meantime, I hope you

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