Last
\nweek, two key U.S. inflation reports came out: the consumer price index (CPI)
\non Tuesday and the producer price index (PPI) on Thursday, both for July. While
\nthe former data showed a moderate increase in line with expectations (0.2%
\nmonth-on-month for the overall CPI and 0.3% for the core CPI), the PPI figures
\nsurprised on the upside: 0.9% month-on-month versus 0.2% expected, with the
\ncore PPI showing the same increase.<\/p>\n
This Which of As the It is What In
\nsuggests that Trump’s trade tariffs are, in fact, driving up prices<\/a>. At
\nfirst, U.S. companies were absorbing the higher import costs, but now they have
\nbegun to gradually pass them on to consumers, something that both the Federal
\nReserve and independent economists expected. As for whether most of the impact
\nhas already been priced in, the latest Beige Book suggests that more companies
\ncould raise prices.<\/p>\n
\nthese indicators matters more? <\/p>\n
\nCME Group points out, since the PPI measures the production costs of consumer
\ngoods and raw materials, and food prices directly affect retail prices, the PPI
\nis often considered a leading indicator of inflationary pressures. In other
\nwords, when producer costs rise (PPI), those increases are usually passed on to
\nconsumers (CPI). That means the August CPI report could end up hotter than the
\nmarket expects.<\/p>\n
\nalso worth noting that inflation expectations are rising. According to the
\nUniversity of Michigan survey, one-year inflation expectations rose from 4.5%
\nto 4.8% in August, and five-year expectations rose from 3.4% to 3.9%. This is
\nimportant because when people expect prices to rise, they often do: companies
\nraise prices, workers demand higher wages, and the cycle feeds real inflation.
\nStill, there\u2019s a bit of relief in the fact that crude oil prices<\/a> have
\nstayed relatively low.<\/p>\n
\ndoes all this mean?<\/p>\n
\nshort, nothing good, especially for the Fed. On the one hand, they\u2019re under
\npressure to cut interest rates to support a labor market that\u2019s suddenly
\nlooking shaky. On the other hand, inflation remains a problem due to trade
\nwars. That\u2019s a recipe for stagflation, where the economy slows down but prices
\nkeep rising. Let’s see if Jerome Powell’s speech this Friday in Jackson Hole
\nsheds more light on the direction of monetary policy.<\/p>\n