Last week, two key U.S. inflation reports came out: the consumer price index (CPI) on Tuesday and the producer price index (PPI) on Thursday, both for July. While the former data showed a moderate increase in line with expectations (0.2% month-on-month for the overall CPI and 0.3% for the core CPI), the PPI figures surprised on the upside: 0.9% month-on-month versus 0.2% expected, with the core PPI showing the same increase.
This suggests that Trump's trade tariffs are, in fact, driving up prices. At first, U.S. companies were absorbing the higher import costs, but now they have begun to gradually pass them on to consumers, something that both the Federal Reserve and independent economists expected. As for whether most of the impact has already been priced in, the latest Beige Book suggests that more companies could raise prices.
Which of these indicators matters more?
As the CME Group points out, since the PPI measures the production costs of consumer goods and raw materials, and food prices directly affect retail prices, the PPI is often considered a leading indicator of inflationary pressures. In other words, when producer costs rise (PPI), those increases are usually passed on to consumers (CPI). That means the August CPI report could end up hotter than the market expects.
It is also worth noting that inflation expectations are rising. According to the University of Michigan survey, one-year inflation expectations rose from 4.5% to 4.8% in August, and five-year expectations rose from 3.4% to 3.9%. This is important because when people expect prices to rise, they often do: companies raise prices, workers demand higher wages, and the cycle feeds real inflation. Still, there’s a bit of relief in the fact that crude oil prices have stayed relatively low.
What does all this mean?
In short, nothing good, especially for the Fed. On the one hand, they’re under pressure to cut interest rates to support a labor market that’s suddenly looking shaky. On the other hand, inflation remains a problem due to trade wars. That’s a recipe for stagflation, where the economy slows down but prices keep rising. Let's see if Jerome Powell's speech this Friday in Jackson Hole sheds more light on the direction of monetary policy.
That said, the stock market does not seem overly concerned. The S&P 500 and Nasdaq have only cooled off slightly. This calm seems to be driven by two factors: A) the hope that the Federal Reserve will cut interest rates in September, and B) the fact that previous declines have recovered quickly. Still, while investors stay optimistic, some signals — like the Buffett indicator — suggest the market may be in bubble territory.
This article was written by IL Contributors at investinglive.com.from Investinglive RSS Breaking Education Feed https://ift.tt/xIVTmS6
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