After the CPI numbers came in close to expectations and showed a year-over-year rate of 2.7%, a couple of days later we got the Producer Price Index (PPI) numbers. These numbers showed a much different picture from the CPI.
The PPI rose 0.9% in the month of July. The Dow Jones had estimated a 0.2% rise. This is quite a difference.
This is a measure of wholesale prices. For an entire index to rise almost 1% in a single month is significant. If this trend holds, you have to believe that consumer price hikes of this magnitude are not far behind.
Stock investors loved the news of the relatively good CPI numbers. They saw it as a go-ahead for a Fed rate cut in September. Yet, when the PPI numbers came out, there wasn’t that much negative sentiment. Why didn’t the script flip? Why didn’t investors fear that there would be no rate cuts coming any time soon because price inflation is obviously still a problem?
The only reasonable answer is that we are in a mania. We are likely nearing the peak of a massive bubble. Good news is good news for stocks. Bad news is good news for stocks. It doesn’t really matter at this point.
Tariff Effects
Some defenders of Trump’s tariffs have pointed out that the tariffs have had little negative impact on the markets or economy at this point.
When the tariffs were first announced in early April, stocks went down significantly. But after Trump seemed to backtrack and leave the door open for negotiations, it has been “up, up, and away” for stocks, even as new tariffs are announced.
Maybe investors still don’t believe that Trump will follow through on most of his talk. But the tariffs are already a reality. Still, say the Trump tariff defenders, it hasn’t caused our prices to rise.
But just as there is a delay between monetary inflation and price inflation, there will also be a delay here.
Some of these tariffs have only been in effect for a short time. Even with that, many retailers in the U.S. are selling inventory that was received before the tariffs went into effect.
And think about making something like a car. It doesn’t get done in just a few days. It takes time. The steel and other materials that are imported that go into making a car are just now arriving at the higher price. Steel tariffs went up in early June. Any car being sold right now was probably made with steel from the previously lower tariffs (taxes).
This very significant PPI number that came out is a warning sign. We could be facing significantly higher prices in just a matter of months.
The one thing that could offset that is a major recession, which also isn’t out of the question.
Take your pick – higher prices or a deep recession.
What if we get both? It will be quite devastating to the living standards of the average American.