Business Economics Investing

Inflation and Tariffs

Yes, I’m going to comment on inflation again today. The June Consumer Price Index (CPI) was released yesterday and the year-over-year change in the index was basically in line with expectations. The markets had a good day and inflation protection in the form of TIPS (Treasury Inflation Protection Securities) got cheaper. Basically, the market is less concerned about inflation now than it was before the June release. Go figure.

Interestingly, the CPI is now rising faster than the New York Federal Reserve Bank’s Underlying Inflation Gauge (UIG). The UIG was rising at a faster pace for much of the past three years. However, the CPI appears to be converging with the UIG, which isn’t surprising given the historical relationship between the two indices. The UIG is definitely something to keep an eye on regularly.

According to the Wall Street Journal, the Median CPI is now at its highest level since the last recession, which isn’t concerning. It simply reflects we are moving deeper and deeper into the current cycle. I think we can all agree we are very likely in the latter stages of this economic cycle.

Finally, I wanted to comment on tariffs…again. In an interview yesterday, the Federal Reserve Chairman, Jerome Powell, made two comments that I gravitated towards. First and foremost, confirmation bias alert, confirmation bias alert. Now back to our regular programming and Mr. Powell’s commentary. He said it’s difficult to predict the impact of trade wars on the U.S. economy. Duh! And he mentioned if the president’s purported objective of getting other countries to lower their tariffs on imported goods is achieved that would be good for the economy. The part I zeroed in on was the president has an objective. He obviously isn’t intentionally trying to lead the U.S. economy into the abyss. Before you write me off as a fan boy of the president (which I’m definitely not), Mr. Powell also cautioned that trade disputes could end up being a negative for the economy, with which I’m in complete agreement.

My personal opinion continues to be that the tariff situation will get resolved before it does meaningful damage to the economy. I may be naive, ignorant and stupid all at the same time. I accept full responsibility for that. However, this looks like a classic game of Russian Roulette to me. It’s very risky and the president may end up proving many of his detractors right if everything blows up in his face and the economy tanks. I believe that to be a distinct possibility but I offer an alternative theory. We all know the president is ego driven and considers himself to be a tough negotiator. It’s in his nature to want to be a tough negotiator and to go against the grain. Isn’t that what he’s doing here? I think so. I may be wrong. I still don’t think there will be a lot of collateral damage to the U.S. economy from the trade war.