Recalculating

In another twist of the plot, the U.S. Producer price index for the month of July was hotter than expected, refueling the debate between those who think tariffs do create inflation and those who don’t. In the chart below, you can see the three most popular metrics for Core inflation: PCE, the one preferred by the Fed, PPI and CPI. All of them seem to be stuck around 3% and it looks like it won’t come down unless there is a deflationary shock (recession?) that helps ease the tensions. But also in the chart you can see why there is an obsession with the 2% level: from 2006 to 2020, that was the norm. But due to the stimuli issued during the pandemic, growth in prices spiked, squeezing the consumers. For most of them to feel alleviated, the US should experience deflation to allow Americans to regain some purchasing power, but that has not been the case. Furthermore, their wages have grown less than prices, and the gap has been covered by debt, typically, credit card debt, the most expensive one. That’s why Trump wants to lower rates desperately; he understands that US citizens vote with their pockets, and right now, they’re empty. With the PPI report yesterday the odds for a rate cut came down slightly to 92%, but still indicates the market is convinced we’ll get a cut in September.

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