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Core Inflation Rises At Fastest Pace Since 2008, Setting Fed On Collision Course With Trump

What could go wrong with this setup?

This week’s headline economic data got a little more interesting on Friday morning when the dollar surged to a one-year high just after midnight following a Financial Times story suggesting the ECB is starting to get concerned about some European banks’ exposure to Turkey amid the collapse in the lira.

Inflation is already running at a six-year high in the U.S., a state of affairs that’s prompting the Fed to lean hawkish for fear that late-cycle fiscal stimulus and the short-term inflationary effects of protectionist trade policies will drive up prices. That hawkish lean is leading to dollar strength, much to the chagrin of Donald Trump, who needs a weaker dollar to fight his trade war.

dxy2

(Dollar index hits one-year high after Friday morning surge)

That’s the backdrop for Friday’s CPI data. “We forecast headline CPI to increase 0.1% MoM and 2.9% on a YoY basis,” Barclays wrote ahead of the print, adding that “as the economy grows above capacity, inflation is expected to mildly overshoot the Fed target.”

Last week, the Fed delivered an upbeat take on the economy setting the stage for a September hike and last month’s jobs report continued to support the narrative, although the headline did miss. Expectations were for core CPI to register a 0.2% MoM gain, leaving the YoY rate at 2.3%.

“Risks are to the upside though, especially if we see pricing behavior front-run possible tariffs”, BNP said, headed in. For their part, Goldman doesn’t “expect a significant boost from the tariffs on $34 billion of Chinese goods, reflecting their incidence (industrial inputs and capital goods as opposed to consumer products).”

Do note (again), that no one expected the initial round of tariffs to have a demonstrable impact on domestic prices. It’s the prospective duties on $200 billion in additional Chinese goods that has folks concerned. Now that Trump has threatened to hike the proposed tariff rate to 25% in the next round (from the initially proposed 10%), the effect on inflation could be more pronounced.

Estimates and priors

  • US CPI MoM, est. 0.2%, prior 0.1%
  • US CPI Ex Food and Energy MoM, est. 0.2%, prior 0.2%
  • US CPI YoY, est. 2.9%, prior 2.9%
  • US CPI Ex Food and Energy YoY, est. 2.3%, prior 2.3%
  • US CPI Index NSA, est. 252, prior 252
  • US CPI Core Index SA, est. 257.8, prior 257

Actual

  • CPI rose 0.2% vs est. 0.2%
  • Forecast range from down 0.1% to up 0.4% from 68 estimates
  • Ex. food, energy m/m up 0.243%; est. 0.2%
    • Ex. food, energy y/y up 2.354%; est. 2.3%
  • CPI Y/y rose 2.9%; est. 2.9%

Ok, so what you want to note here (obviously) is that YoY core print. That’s the “best” (depending on how you want to define “best”) number since September 2008.

CPI

(Core CPI rises at fastest pace since 2008)

Again, the more data like this we get, the more justified the Fed is in hiking rates. The next round of tariffs on China will likely exacerbate this situation.

Late last month, SocGen’s Omair Sharif spent quite a bit of time documenting the read-through for inflation if Trump does indeed move forward with tariffs on an additional $200 billion in Chinese goods. “Unlike a similar $50 billion list unveiled in April, which was composed largely of industrial supplies and components, the proposed $200 billion tally includes a slew of finished consumer items”, Sharif wrote, referencing the USTR list published last month, before reminding you that “according to the Peterson Institute, consumer goods account for about $44 billion, or nearly 23%, of the proposed list.”

TariffBreakdown

(SocGen)

He went on to explain what this would mean for inflation as follows:

With about 4.5% of the core CPI subject to a 10% tariff, and assuming that it is entirely passed on to consumers, the impact from the implementation of the tariffs would be around 45 bps on the yoy core CPI rate. As we saw with tariffs on laundry equipment this year, tariffs on household appliances could ripple through into retail prices relatively quickly.

Again, that assessment was based on the assumption of a 10% tariff on the new list. A subsequent Bloomberg article underscored the point made above about how this muddies the waters for the Fed. In their piece, they mention SocGen’s Sharif and what the prospect of a 25% tariff on those same goods would mean for consumer prices. Here’s the relevant excerpt:

Implementing the tariffs would complicate the Federal Reserve’s decision-making on interest rates. Omair Sharif, an economist at Societe Generale in New York, said a 25 percent tariff on the entire $200 billion product list could cause inflation to surge by 1.1 percentage point. Assuming the levies get passed along to customers, the annual increase in the consumer price index, excluding food and energy, would jump to 3.4 percent from the current rate of 2.3 percent.

Starting to get the picture?

Oh, and finally, recall this from last week:

As Bloomberg’s Brian Chappatta notes, “real average hourly earnings in the U.S. were down 0.2% in July from a year ago [and] that hasn’t happened since 2012.”

real

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