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Written by: Tim Pierotti
The Producer Price Index (PPI) came in much hotter than expected this morning. The month over month expectation was a .2% rise while the actual came in at .9%. The year over year number was 3.3% versus expectations of 2.5%. It is rare for the consensus to be so far off, but things are changing fast. Much of the upside surprise came from higher trade services which are being driven by tariff policies. Markets have taken the news in stride as Wall Street consensus appears to be increasingly sympathetic to the Scott Bessent argument that tariffs are a one-time adjustment and therefore should be “looked-through”, essentially ignoring the inflation data until the prices have been reset. In fact, post the hotter data released this morning, the odds of a Fed rate cut in June barely budget off of 100% odds! Must admit that has kind of shocked me.
Jackson Hole is next week and as always, the Fed Chair will discuss his outlook. Jerome Powell is between a rock and a hard place. The President and the Treasury Secretary are putting more political pressure on Powell than any Fed Chair has had to endure in modern history. On Wednesday, the White House Press Secretary didn’t deny that the President is considering a lawsuit against Chair Powell. Despite inflation data accelerating, markets are still pricing in that the Fed will cut rates in September. In fairness to those who agree with the administration, the labor market is weakening. However, the unemployment rate remains at 4.2% and wage growth is still running at over 4%. Importantly, there is also no evidence that financial conditions are too tight. Credit spreads are extremely tight, equities are at all-time highs, the dollar is in a weakening trend, so why do we need to lower rates when inflation is inflecting higher?
The key question is just how transitory is tariff inflation? Is Bessent right and it really is a one-time price adjustment? Our view, our educated guess, is that the reversal of decades of trade liberalization is going to have an enduring impact. Tariffs are a tax. They are a regressive consumption tax borne increasingly by consumers. Recent guest of our podcast, Peter Boockvar put it this way this morning, “Bottom line, no, tariffs don’t somehow disappear into the ether and yes, US businesses and consumers are eating most of it AFTER the foreign exporter price cut. On the other hand, yes, tariffs are technically one time but if this whole massive tariff experiment mucks up global supply chains and results in a multi-year process of shifting things around, you will see a multi-year impact on pricing.”
I don’t know what Powell will say next week, but I do not envy his position. The Fed will wrestle with the question of the transitory or non-transitory nature of protectionism for years to come. But for now, we are all just guessing and yet the markets are behaving as if Bessent’s view is a certainty. It is not. I think Powell would be wise to use his platform in Wyoming to express that he is dubious of that certainty.
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