Where is the Tariff Inflation?

There was additional tariff news this week with an announcement of 30% tariffs on Mexico and the EU. August 1st has become the new effective date for global tariffs for countries that haven’t secured a trade deal with the US.

Fed Comments: Tariffs Unlikely to Fuel Inflation

This week saw two important inflation reports with the Consumer Price Index (CPI) and Producer Price Index (PPI). Both were good reads on current inflation and begs the question: Are we really going to see a permanent increase in inflation due to the tariffs? Several speakers this week shed a little light. 

Federal Reserve (Fed) Governor Waller (a leading candidate to become the next Chairman) stated that he believes the tariffs will produce a one-time-only increase in prices and not persistent inflation which would be a concern to the Fed. He also indicated that only about 1/3 of the price increase is likely to be passed onto the consumer. The rest would be absorbed by the rest of the supply chain.

PPI Report: Wholesale Inflation Flat in June

On the wholesale inflation side, PPI came in lower than expected. The headline number was actually 0.0%. The core rate also came in at 0.0%. The markets expected positive reaction was muted due to previous monthly revisions higher, but it was still a very good report for rates. Looking at PPI and CPI together, the feared tariff impacts didn’t materialize. There was some increase in the price of goods, but the lower price of services offset this increase.

CPI Report: Core Inflation Slows in June

CPI for June showed a rise of 0.3% which met expectations. The yearly number rose to 2.7% due to removal of the replace from last year which was a 0.0% read. Remember, these are averages for 12 months. Each month that reports “replaces” the previous year’s number. If the number for the month last year was very low, as it was last year, you can have an increase in the yearly read even with a low inflation report. 

The Core CPI, which strips out volatile food and energy prices, rose less than expected by 0.2%. Used and New car prices fell, and food prices were tame showing no indication of tariff influence this month. Shelter costs showed the lowest reading since 2021, which is great progress and shows it is finally catching up with the present reality.

Fed Watch: Warsh Pushes for Rate Cuts

Another Fed Chair candidate and past Fed member, Kevin Warsh, gave a strong interview on CNBC this week. He argued, very similarly to Fed Governor Waller, that it is time for the Fed to cut rates.

Warsh believes the Fed is looking at outdated models in their decision making and needs to change their approach. He believes their think inflation comes from a hot economy and therefore is why they want to keep it cool. Warsh thinks inflation comes from unbridled government spending and printing money.

NAHB Index: Builder Sentiment Still Weak

We saw some interesting housing data on Friday. The National Association of Home Builders (NAHB) issued their market index, measuring builder sentiment. It rose slightly to 33 but is still well under the 50 level that would indicate a positive outlook. 

Single Family Home permits fell as did Single Family Home starts. Completions fell 15% to a 1.3M annualize pace. This indicates less homes for sale in the future. Over the past 5 years Household Formations have been averaging 1.8M annually. If we compare a 1.8M annual increase in demand vs the 1.3M annual increase in supply, we can see this is way out of balance. This will likely lead to continued home price increases. A rate decline will only exacerbate this.

Looking Ahead: Quiet Week for Data

Next week is a quieter week for economic news. This means technical levels will take priority:

Wednesday, July 23:

• Mortgage Applications
• Existing Home Sales

Thursday, July 24:

• Initial Jobless Claims
• New Home Sales

Friday, July 25:

• Durable Goods Orders