Cogito Ergo Non Serviam
CPI Rises Foreshadowing Autumn Stagflation
The US Consumer Price Index report came out a short while ago showing that the prices in the US are rising at an annualized rate of 2.9%, up from 2.4% in May. Wall Street breathed a premature sigh of relief with a print that was close to expectations. Fear of tariff-induced inflation receded with this report, and the market is wondering when the Fed will cut rates. This journal remains unconvinced. Inflation has yet to see much influence from the tariffs, and for that reason, one believes the storm is coming this autumn.
Bloomberg reported, "Core inflation was held down by declines in both new and used vehicle prices, along with airfares and lodging costs. Housing prices were also tame relative to the years of high inflation, with shelter up 0.2% on a monthly basis. Effects of tariff increases were visible in a number of categories, with household furnishings up 1%, for the biggest rise since January 2022; video and audio products up 1.1% -- the most since February last year; and toy prices climbing 1.8% on the month, the most since April 2021."
The wire service noted that August will see more significant tariff increases. In other words, the uptick seen in June is only the beginning. Despite this, the market is expecting rate cuts to start in September. That seems wrong. If inflation ticks much above 3%, one can forget rate reductions. If it should start approaching 4%, the next rate move will be up not down.
The increase just reported is small, and it is easy to dismiss it as a blip, a rounding error or a statistical anomaly. The jury is out on that. That could be the case. Alternatively, it could be the end of the downward trend that President Biden started back in 2022. It will take at least another month of data before one can be something close to sure.
"It's really hard to point to this report or any details in the report and say, 'Aha! See what's happened to prices because of tariffs,'" said Dan North, senior economist at Allianz Trade North America. "You get these pretty massive tariff increases. It"s bound to pass through to the consumers, and I still think it will, but it's not in this report so far."
If there is one wild card in all of this, it is the resilience of the American economy. A whole pile of bad stuff can happen yet US GDP keeps rising. This journal has not always been appreciative of this fact, but the data show that the American economy can withstand a great deal. It could be the difference between a weak but growing economy and a real downturn.
Nothing in this report suggests that the threat of stagflation is over. Indeed, it strengthens the argument. First quarter GDP was lower by 0.5% compared to fourth quarter 2024. Another negative growth quarter would mean an official recession. Stack that beside rising inflation and the odds are stagflation is making its entrance now. The August jobs report will help clarify that, but a negative print then would be the final piece of the puzzle, but there is that resilience to address.
This journal believes that the Fed will attack inflation before it fights unemployment if stagflation this autumn makes them choose. The settlement of the tariff threats would be a major help, but one is certain that is beyond the realm of probability.
Ernest Hemingway said he went bankrupt gradually then suddenly, and that is true for most economic changes. They start gradually and build speed until they become difficult to stop. Inflation ticking up and GDP moving down seems to be a stagflationary build up.
Nothing would make one happy more than being completely wrong.
© Copyright 2025 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.
|
|
|
