In my nightly review of financial and social media trying to get some feeling for where the CPI print will come in tomorrow morning, I’ve determined that the inflationista and disinflationista camps are as clueless as I am. Which means yours truly has a pretty good chance of guessing that the trap door is set and both camps might walk on to it unaware of how treacherous the next sixty days might be for macroeconomic projections.
This author prefers the Atlanta Federal Reserve’s Sticky CPI report because it is much more reflective of the price impacts seen by the masses versus the random hedonic gymnastics the BLS engages in every month. After the last report, it was easy to see why I’m somewhat bearish about the direction of inflation for the American economy:
3.1% is still higher than 2% and from a perspective of direction, it is not an indicator reflecting disinflation any time soon. Does this really matter to the new Chairman of the Federal Reserve Kevin Warsh? Not so much as of yet as his task force was just formed and all of us must wait to see what new instruments they develop for measuring various economic data points.
One measure the Fed and FOMC do pay some attention was developed by the New York Federal Reserve Bank and the Multivariate Core Trend of PCE Inflation is worthy of reviewing upon its release. The latest edition was published on June 26th:
In this case, despite a slight decline from April’s the rate contracted slightly in May from revised lower numbers the month before. The headline and core PCE however is a damning number and obviously handcuffs the FOMC from taking any decisive action in any direction probably through the September meeting.
So where is the trap door one might ask? Liberty Economics via the NY Fed website provides a hint with this research paper published on July 8th:
More Tariff Pass‑Through Is in the Pipeline
The survey data in the paper appears fairly straight forward for readers to comprehend the potential for slowing future inflationary pressures due to tariffs:
The trap door however is further on in the paper where a warning was sent to all that actually take the time to read the report and understand that this is not unique to the FRBNY’s district:
In our surveys, businesses cited two main reasons for planning price increases so far into the future.
First, some businesses operate under contracts with fixed selling prices and are unable to raise prices until such contracts expire, forcing them to absorb cost increases in the meantime. Indeed, research has found that long-term contracts can impede businesses from passing through cost increases.
Second, some businesses reported taking a “trickle up” approach to price increases, where they gradually raise prices over time rather than immediately raising prices to fully cover tariffs. This pricing strategy allows firms to avoid shocking their customers with sharp price increases while retaining the ability to accelerate price increases if input costs continue to rise. Moreover, uncertainty surrounding future tariff policies—including potential rate changes, exemptions, or tariff responses from other countries—may be causing some firms to adopt cautious, incremental pricing strategies rather than making large, discrete adjustments. This behavior extends the period over which tariff-related price pressures work their way through the economy.
All emphasis in the paragraph above is from this author.
While fewer companies are planning on passing tariff costs on to their customers, the gradual increase in prices will put a higher floor under a higher level of inflation for longer, something the Atlanta Federal Reserve’s Sticky CPI captures quite well. The decline in petroleum product prices in June might save this report and indicate a small down tick down in Core CPI probably to a 2.7 or 2.8% annual rate of change. Core PCE will probably fade somewhat less to a 3.15 to 3.25% rate, still substantially above the Fed target.
Unfortunately for Trump and Warsh, the restart of the Iran war tonight will erase those declines quite rapidly putting the FOMC behind the eight ball when reviewing what data they have indicating conflicting signals about the condition of America’s economic strength versus actual embedded core inflation. This leaves Chair Warsh with little choice but to do as predicted which is nothing through the September meeting potentially enraging our happy missile firing Commander-in-Chief.