CONSUMER WATCH

Fast-casual restaurants face a slowdown

Fast-casual restaurants are suddenly immersed in a sales slowdown as consumers — especially cash-strapped Gen Zers — grow wary of the economy and become more price sensitive.

The fast-food industry had already taken a turn for the worse as low-income consumers shy away — but fast-casual restaurants typically have more insulation from a downturn because they target higher-income customers.

“Greater pressure on lower income consumers” is hurting the entire restaurant industry, according to Bank of America analyst Sara Senatore.

The fast-casual fallout is widespread:

• Sweetgreen’s same-store sales plunged 7.2% in its most recent quarter.
• Chipotle reported a 4% decline.
• Cava — which is still growing rapidly via new locations — reported a huge slowdown in same-store sales growth to 2.1% in its most recent quarter from 10.8% the previous quarter. Its stock tumbled 16% Wednesday morning.
• Wingstop posted a 1.9% decline in U.S. same-store sales.

A big reason for the “softening state of fast casual in recent months” is that Gen Z consumers are facing rising unemployment and a reduction in discretionary income, according to TD Cowen analyst Andrew Charles.

• Charles pointed to the recent resumption of federal student loan payments as a driving force in reduced restaurant spending among Gen Z.
• Of all the major fast-casual and fast-food chains, Cava and Sweetgreen rely the most on 18-to-24-year-old consumers, deriving 19% and 18% of their business, respectively, from that demographic, according to TD Cowen.
• Wingstop relies the fourth most on that group of consumers, getting 16% of its sales from them.
• “Pressure on consumer spending for many of our consumers has persisted longer than we expected,” Sweetgreen CEO Jonathan Neman told investors on an earnings call last week. “I think it’s pretty obvious that the consumer is not in a great place overall.”
• “We’re operating in a fluid macroeconomic environment, and it’s one that sort of creates a fog for consumers where things are changing constantly,” Cava CFO Tricia Tolivar said Tuesday on an earnings call. “During those times, they tend to step off the gas.”

Data: Company earnings reports; Chart: Kavya Beheraj/Axios

Ordinarily, a slowdown in fast casual would lead to an uptick in fast food as consumers trade down — but “our most recent franchisee checks suggest this does not appear to be the case,” Charles said.

• Same-store sales in the most recent quarter declined 3.6% at Wendy’s, 5% at KFC and 0.9% at Popeyes.
• McDonald’s posted 2.5% growth, but needed a huge marketing campaign, $5 value meal and new products like chicken strips to get there.
• “Visits across the industry by low-income consumers once again declined by double digits versus the prior year period,” CEO Christopher Kempczinski said last week on an earnings call.

Campbell’s CEO Mick Beekhuizen said in June that ‘”consumers are cooking at home at the highest levels since early 2020.”

• Why American fast-food chains are struggling

Restaurant dining is often the first thing to go when the economy takes a turn for the worse.

Wendy’s on Friday became the latest in a series of fast-food chains to report disappointing results in the U.S., where its same-store sales fell 3.6%.

• KFC reported earlier this week that its U.S. same-store sales declined 5% in its most recent quarter.
• Pizza Hut’s U.S. same-store sales also slipped 5%.
• Popeyes posted a 0.9% decline, while Burger King eked out a 1.5% increase.

McDonald’s outshone the competition with a 2.5% sales increase, but the company warned that low-income folks are shying away from fast food.

• “Visits across the industry by low-income consumers once again declined by double digits versus the prior year period,” CEO Christopher Kempczinski said on an earnings call Wednesday.
• “Reengaging the low-income consumer is critical as they typically visit our restaurants more frequently than middle- and high-income consumers.”

When the fast-food economy takes a turn for the worse, it shows up quickly in breakfast sales, according to Wendy’s interim CEO Kenneth Cook.

• “When consumer uncertainty increases and consumers choose to eat another meal at home, breakfast is often the first place that they do that with,” he said Friday on an earnings call, acknowledging that “breakfast continues to perform worse than rest of day.”
• McDonald’s Kempczinski said the same thing, calling breakfast “the most economically sensitive” meal, and the easiest one for a stressed consumer to skip or eat at home.
• “We, as well as the rest of the industry, are seeing that the breakfast daypart is absolutely the weakest daypart in the day,” Kempczinski said Wednesday.

In this chart relayed by John Mauldin, the red line shows cumulative inflation since 2019. The two blue lines are spending growth by consumers in the bottom 40% and the 40% – 80% income percentiles. The green line is the top 20% earning households.

The top 20% account for practically all real spending growth over
the last five years. The gap widened considerably over the last two years.

But the chart also shows that spending in all income categories has stalled since 2024.

This next chart shows what nobody is talking about: total real expenditures are unchanged since December 2024 while generally resilient services are up only 0.2%.

Richard Bernstein’s chart “shows the ISM Services Prices Paid Index (a proxy for inflation) versus the ISM Services New Orders (a proxy for growth). One can see stagflation potentially forming for the first time in more than 15 years.”

US Small-Business Optimism Rises to Five-Month High on Economy

Sentiment among US small businesses climbed to a five-month high in July as owners grew more upbeat about the economic outlook, fueling a pickup in expansion plans.

The National Federation of Independent Business optimism index increased 1.7 points last month to 100.3, according to data out Tuesday. Six of the 10 components that make up the gauge improved.

A net 36% of owners expect better business conditions, up 14 percentage points from a month earlier and the most this year. A net 16% said now is a good time to expand their business, the largest share since January.

“The small-business sector is waiting for the rollout of the One Big Beautiful Bill provisions and the final shape of the tariffs,” NFIB Chief Economist Bill Dunkelberg said in a statement. “Uncertainty remains high.”

The group’s uncertainty index rose by the most since the start of the year. At the same time, the survey showed price pressures eased. The net share of small businesses that raised prices dropped to 24%, the lowest since January. Fewer firms also expect to boost prices in the next three months. (…)

Sounds bullish, but the charts show a more muted picture:

• Actual sales are still in negative territory:

• Price increases are still very high vs history:

• Actual and planned employment are still weak and weakening:

• So, less incentive to raise compensation:

• Actual and planned capex remain low:

Eurozone Industrial Production Slumps More Than Expected as Tariff Effects Sting Industrial production fell 1.3% on month in June, reversing the 1.1% May increase

The data highlights that the boost to production from U.S. firms’ stockpiling of European goods to get ahead of expected tariffs has now faded. Industrial production grew solidly in the first quarter of 2025, but has gradually retreated since President Trump’s announcement of a flurry of tariffs on goods imports at the start of April.

All categories of production of goods—from longer-lasting durable goods to shorter-term consumer goods—declined on month in June. Energy production increased modestly.

Some of the decline was dragged by an 11% slide in production in Ireland, as exports from there to the U.S. halved after a first-quarter boom led by pharmaceuticals. German industrial output also declined 2.3% in June, though in France and Spain production rose 3.8% and 1.1% respectively, the data showed.

Why Businesses Say Tariffs Have a Delayed Effect on Inflation

(…) In uncertain times, anecdotal evidence from businesses can be especially insightful. We are learning how businesses are reacting to tariffs through the Richmond Fed’s business surveys as well as through hundreds of one-on-one conversations with Fifth District businesses since the start of 2025.

These conversations showcase that navigating tariffs is a complex and sometimes protracted process for firms, particularly when there is uncertainty. Firms describe several reasons they may not have experienced the full impact of proposed tariffs yet (even when goods and countries they deal with are subject to them), as well as reasons that even when they have incurred tariff-related cost increases, there can be a delayed impact on pricing decisions.

Reasons Firms May Not Have Incurred Tariffs Yet

Business contacts describe several strategies or circumstances that can delay or reduce the tariffs on inputs or other imported items. These include the following:

• Delayed ordering. In response to announced tariffs, many firms ran down existing inventories or ran inventories lean in hopes that tariffs would become lower. (…)
• Delaying the tariff charge. Firms report using short-term tactics that allow a good to be shipped but delay the point at which the tariff is incurred. (…)
• Cost-sharing. Vendor relationships are often long term, and many firms report partnering with suppliers and customers to share costs. When tariffs first rolled out, multiple firms (a beverage distributor, supply chain logistics company) anticipated a “rule of thirds” where the cost was split evenly among the supplier, the importer, and the customer. A national retailer reported being large enough to force suppliers to bear much of the cost, though it varied by relationship and item. Interestingly, firms also reported that cost-sharing is not necessarily a permanent solution: A steel distributor said that with the second round of tariffs announced in June, “The ‘kumbaya’ of cost-sharing was likely to come to an end.” Similarly, a fabric manufacturer said that upon an announced trade deal with Vietnam that took tariffs from 10 percent to 20 percent, suppliers took a new stand on cost sharing: “Most vendors said you’re on your own” for the second 10 percent, and one even clawed back cost-sharing from the first round.
• Transit time. It takes up to six weeks for container ships to arrive to the East Coast from China, so even if firms are ordering goods, there is a natural delay when the tariff is incurred.
• Tariff implementation delays. Richmond Fed economist Marina Azzimonti has found that a variety of tariff implementation delays help explain why actual tariffs as of May 2025 were much lower than expected. These factors include legacy exemptions and delays in customs system updates. Azzimonti also finds that a small percentage is explained by countries substituting away from high-tariff countries. For example, one national retailer we spoke with was in the process of dropping 10 percent of products sourced from China. Whether a company can change sourcing varies dramatically by type of firm and product.

As our monthly business surveys have found, many firms report deploying more than one strategy to delay tariffs. Notably, many of these delays are only temporary.

Reasons Tariffs May Have a Delayed Impact on Prices

Even when firms have incurred tariffs, they give several reasons why tariffs may not be immediately reflected in the prices they charge for their products. These include the following:

• Waiting for tariff policy to clarify. Higher prices could reduce demand for goods and services and/or lead firms to lose market share, so many firms said they are hesitant to increase prices until they’re sure tariffs will remain in place. For example, a large national retailer said if tariffs are finalized at a sufficiently low level, they’ll absorb what they’ve incurred to date, but if high tariffs stick, they’ll have to raise prices. A steel fabricator for industrial equipment described being reluctant to raise prices on the 10 percent cost increases they’d seen thus far but would have to raise prices should the increases reach 12 to 13 percent. A grocery store chain was reluctant to raise prices and instead might reduce margins, which had recovered in recent years, to maintain their customer base. Some firms explicitly noted a strategy to both raise prices over time and pursue efficiency gains to cut costs and completely restore margins within a year or two.
• Elasticity testing. Firms reported testing across goods whether consumers will accept price increases. A furniture manufacturer said he’s seen competitors pass along just 5 percentage points of the tariffs at a time so it isn’t such a huge shock to customers, though in that sector, “We all end in the same place which is the customer bearing most of it.” A national retailer said most firms are doing a version of stair-stepping tariffs through, e.g., raising prices a small amount once or twice to see if consumer demand holds, and if so, trying again two months later. This retailer said prices were going up very marginally in early summer, would increase more in July and August, and would be up by 3 to 5 percent by the end of Q4 and into 2026. Another national retailer said they would start testing the extent to which demand falls with price increases, e.g., when the first items that were subject to tariffs — in this case back to school items — hit shelves in late July.
• Blind margin. Some firms reported attempting to pass through cost in less noticeable ways. While any price increase to consumers will be captured in measures of aggregate inflation, the fact that price increases may occur on non-tariffed goods might make it difficult to directly relate price increases to tariffs. An outdoor goods retailer said, “Unless it’s a branded item where everyone knows the price, if something goes for $18, it can also go for $19.” A national retailer plans to print new shelf labels with updated pricing, which will be less noticeable for consumers compared to multiple new price stickers layered on top. This takes time (akin to a textbook “menu cost” in economics), so it will not be reflected in prices until July and August. A grocery store said their goal was to increase average prices across the store but focus on less visible prices.
• Preestablished prices. Many firms face infrequent pricing due to factors like annual contracts or presales. For example, a dealer of farm equipment gets half its sales through incentivized presales to lock in demand and smooth around crop cycles. They noted that while it would be difficult to retroactively ask those customers to pay for part of the tariff, they will pass tariffs directly through on spare parts. A steel fabricator for industrial equipment has a contract for steel through Q3, so they haven’t been impacted yet by price increases. However, they will face new costs once that contract expires.

In general, compared to small firms, large firms have more ability to negotiate with vendors, temporarily absorb costs, burn cash, wait for strategic opportunity, and test things out. This matters because large firms often lead pricing behavior among firms, so these strategic choices may influence the response of inflation to tariffs more generally. Even within firm size, one often hears that negotiations on price vary considerably by relationship and item.

Will Trump’s Tariffs Get Tariffried By The Courts?

The Trump administration is becoming increasingly concerned that the US Court of Appeals for the Federal Circuit in Washington, D.C., might soon rule that President Donald Trump lacks the legal authority to impose tariffs as he has been doing. That’s our takeaway from a letter dated August 11 sent to the Clerk of the Court by two of the administration’s top lawyers. It involves a challenge to President Trump’s authority to impose tariffs under the International Emergency Economic Powers Act (IEEPA). (Hat tip to Jim Lucier of Capital Alpha Partners.)

The letter follows the Federal Circuit’s July 31 oral argument, where judges reportedly pressed the government on the tariffs’ legality. So it was filed post-oral argument to update the court on “pertinent and significant” developments since the government’s briefs were submitted. Trump’s lawyers seem to be anticipating that they will lose the case and are asking for a stay if so. That would allow them to ask the Supreme Court to rule on the matter. SCOTUS might pass on doing so if most of the 12 lower-court judges rule against the administration.

The letter warns: “Suddenly revoking the President’s tariff authority under IEEPA would have catastrophic consequences for our national security, foreign policy, and economy. The President believes that our country would not be able to pay back the trillions of dollars that other countries have already committed to pay, which would lead to financial ruin.” That “could lead to a 1929-style result.” The letter concludes: “In short, the economic consequences would be ruinous…”

The conclusion may be exaggerated, but the result would be messy for sure. Foreign governments might not abide by their recent trade agreements with the US. Companies that have been paying the tariffs are likely to demand refunds from the Treasury. (…)

If he loses in court, these [bond] yields might move higher. Stock prices might decline on this news initially due to a new round of policy uncertainty. So the dire tone in the letter is understandable, even though it is a wee bit over the top. (…)

Jim Lucier, our good friend at Capital Alpha Partners, wrote yesterday: “We expect a decision by the Federal Circuit by the end of September, but we believe it could come as soon as late August. An en banc decision by the Federal Circuit that is unanimous or near-unanimous could give the Supreme Court cover not to take up the case immediately, and not to grant a stay that would keep the tariffs in place if the Federal Circuit revokes them.”

Home Ownership Affordability Monitor Update

Americans’ 401(k)s Are More Tied to Stocks Than Ever Even in target-date funds that shift from stocks to bonds, more is going into stocks

Workers across nearly all age groups are investing record portions of their 401(k) accounts in equities. After years of relentless market gains, they are either allocating more to stocks or having it done for them by money managers.

Workers in their late 30s had 88% of their 401(k)s in stocks last year, versus 82% a decade earlier, according to Vanguard Group, which examined the average stock allocations of the millions of people in the plans it administers. 401(k) investors in their early 60s had allocations to stocks of 60%, up from 57% a decade ago.

Even in target-date funds, which move money from stocks to bonds as retirement approaches, more is going into stocks. At the end of 2024, the average equity allocation for workers in target-date funds just beginning their careers was 92%, according to Morningstar, up from 85% in 2014. (…)

• How One Big Private-Equity Fund Makes Its Numbers Incomprehensible Tricks of the trade gain new importance as 401(k) accounts open up to alternative investments

(…) President Trump last week signed an order seeking to open up Americans’ 401(k) retirement accounts to private equity and other alternative investments. (…)

To date, private equity has generally been the domain of institutions and high-net-worth individuals with long-term investment horizons and a high tolerance for risk and illiquidity. Less wealthy, ordinary investors have traditionally had only limited access. Their ability to participate has been growing, however, as more funds register with securities regulators and publicly disclose their financial reports. The funds may invest directly in other private-equity funds, or purchase stakes in them on the secondary market from existing investors.

Such funds should, at a minimum, allow investors to see how much each private-equity holding originally cost and compare that with its latest carrying value. Some funds are making this exercise difficult. This is particularly problematic in light of recent controversies over some of the industry’s valuation methods.

Among the hottest flashpoints: Some funds have exploited an accounting loophole by buying stakes in other private-equity funds at big discounts on the secondary market and then marking them up immediately to their official net asset values. Sometimes the technique has resulted in gains of 1,000% or more in a single day. (…)

Take, for instance Partners Group Private Equity (Master Fund), which last reported almost $16 billion of net assets. It is the largest SEC-registered private-equity fund, according to Interval Fund Tracker. Individuals investing in the fund must meet certain minimum financial criteria. To exit from the fund, investors submit redemption requests during designated tender periods.

The schedule of investments in the fund’s latest annual report listed 1,089 individual private-equity investments in a table that included the fair value and acquisition date for each. In a footnote to that table, however, it listed 1,095 different cost figures.

That is six more cost figures than there were investments. The footnote spanned three pages, single-spaced.

In other words, there is no way someone reading the annual report could determine which cost figure applied to which investment—and no way to gauge which investments might have fishy markups. A review of previous reports showed the Partners Group fund sometimes had done this before. (…)

A Wall Street Journal review of disclosures by other similar funds showed they use the same footnote technique. At those funds, however, it was at least possible to match costs to the corresponding investments. That is because the number of cost figures in the footnotes aligns with the number of disclosed investments. These include private-markets funds run by well-known managers such as Hamilton Lane, Franklin Resources, Coller Capital, Pantheon, Pomona and FlowStone.  (…)

Inflation Held Steady at 2.7% in July Prices excluding food and energy categories rose 3.1% over the past 12 months, above forecasts

(…) For the Fed, the lack of a more alarming acceleration in price pressures likely removes an obstacle to lowering rates in response to growing worries about a slowing labor market. (…)

Prices either fell or stabilized in the categories that consumers tend to pay the most attention to: shelter, energy and groceries. That helped keep overall inflation in check.

Energy prices declined, grocery prices were roughly flat, and rent growth was modest in July. (…)

But muted inflation for energy and housing was offset by higher costs elsewhere, including some categories such as furniture, tires and pet products, that saw larger increases last month.

“That’s definitely a sign of tariffs passing through,” said Alan Detmeister, economist at UBS investment bank. (…)

In an interview on Fox Business Network Tuesday afternoon, Treasury Secretary Scott Bessent encouraged the central bank to consider a larger half-percentage-point rate cut at its September meeting. Bessent, who earlier this year warned the economy might face a “detox period” as it cut government spending, said the Fed could have been lowering rates at its last two meetings given payroll gains that were revised lower.

• Bets on Outsize Fed Cut Gain Steam as CPI Data Backs Doves

A largely benign US inflation report is bolstering the case for traders betting that the Federal Reserve will soon cut interest rates, with some seeing an increased possibility of an outsized reduction.

For weeks, investors have piled into swaps, options and outright Treasury longs to wager that subdued inflation will allow the Fed to lower borrowing costs in coming months. There’s some vindication for that view, with shorter-term Treasury yields dropping for a second day on Wednesday, while swaps traders lifted the odds of a September rate cut to more than 90%.

Bets that the Fed will reduce rates by more than 25 basis points in September also gained traction, with traders adding some $2 million in premium on Tuesday to a position in the Secured Overnight Financing Rate (SOFR) that would benefit from such a move.

The inflation report “was a bit stronger than we have seen over the prior few months, but lower than many have feared,” said Rick Rieder, chief investment officer of global fixed income at BlackRock, in a note. “As a result, we expect the Fed to begin cutting rates in September, and it could be justified cutting the Funds rate by 50 basis points.”

Tuesday’s report was far from an all-clear for the Fed. Though a tepid rise in the costs of goods tempered concerns about tariff-driven price pressures, underlying US inflation accelerated in July by the most since the start of the year. (…)

Wells Fargo’s account:

July CPI: Broad Heat in the Core

Excluding food and energy, the core CPI was hotter, rising 0.32% over the month and pushing the year-over-year rate up to 3.1%—its highest year-ago reading since February.

The details show tariff-related price increases continuing to seep into the economy, with core goods prices rising 0.2% in July amid additional increases for heavily imported items, such as household furnishings and recreational goods.

Core services inflation picked up a stronger-than-expected 0.4% as a rebound in airfares and a strengthening in medical care services prices overtook the gradual moderation in primary shelter cost growth. Yet, with medical care and airfares not serving as source data for the PCE deflator, we currently estimate the core PCE index rose a softer 0.22% in July.

Today’s CPI report illustrates the challenges the Fed faces in its efforts to balance its price stability and maximum employment dual mandate. The labor market is showing signs of lost momentum, but inflation is 1) still above the 2% target and 2) drifting in the wrong direction.

We are skeptical of rate cuts much deeper than our current forecast of 25 bps cuts at the FOMC’s next three meetings given the prospects for above target inflation over the next year. Unless the labor market deteriorates more markedly, it is hard to make the case that monetary policy should be accommodative at present, in our view. (…)

For all the consternation over the impact of tariffs on goods prices, it was mostly service-related categories that accounted for the firmer core reading in July. Medical care services (+0.8%) and airfares (+4.0%) posted monthly readings that were stronger than we were expecting and above their recent trends. (…) Primary shelter inflation continues to moderate on trend and is starting to approach its pre-pandemic pace.

Core goods inflation was 0.2%, below the 0.3% we were expecting but above the 0.05% that this category averaged in the 12 months ending in June. Tariff-related price increases continued to seep slowly into the data, with prices for household furnishings, apparel and recreational goods once again climbing higher. Prices for used autos rose 0.5% in the month, while new vehicle prices were roughly flat in July.

With medical care and airfares not serving as source data for the PCE deflator, the Fed’s preferred measure of inflation looks likely to be somewhat softer in July. We currently estimate the core PCE index rose 0.22% last month. We will update our estimate following Thursday’s PPI report. (…)

Meantime, energy prices slid 1.1% in July with broad-based declines in gasoline (-2.2%) and energy services (-0.3%). Over the past year, energy prices are down 1.6% and have served as a source of deflationary pressure on overall consumer prices. Yet the downdraft has been due largely to lower oil prices.

Energy services, while dipping in July, are up more than 7% over the past year. Further strength is likely in store, specifically for electricity prices, as utilities contend with higher upkeep costs and growing demand for nonresidential uses. (…)

The pass-through to prices from higher tariffs is not a one-month event. Stockpiling and reluctance to immediately raise prices has helped mitigate the impact to consumers thus far. However, with tariff rates settling higher and no reason to think they will come down for the foreseeable future, we expect the added costs will continue to seep through to selling prices in the months ahead, leading to further strength in goods prices.

Core services inflation is likely to slow only somewhat further in the near term, with primary rents, airfares, motor vehicle insurance and medical care services all at or near their disinflation nadir.

(…) we are skeptical of rate cuts much deeper than this given the prospects for above target inflation over the next year due to higher tariffs and fiscal stimulus that will start to hit the economy sometime in H1-2026. Unless the labor market deteriorates more markedly, it is hard to make the case that monetary policy should be accommodative at present, in our view.

My observations:

• Goods deflation seems over. Prices are not exploding but goods are no longer contributing to slowflation:

• Services inflation has seriously accelerated since its March low, in spite of slowing wages and low oil prices. Many surveys mentioned tariffs as a source of services inflation. Maybe service providers are more easily passing through their tariff-related cost increases.

• The correlation between services and headline cpi inflation is 88.2% since 1969:

John Authers:

Tariff Derangement Syndrome Is Meeting Reality The links between inflation, a rate cut, and a record for stocks aren’t what they seem.

Outside food and energy, US prices are picking up again. Disinflation after the epic post-pandemic price shock is over. In other news, the latest nominee for the Federal Reserve’s board of governors is chiding his new colleagues for “tariff derangement syndrome” and the US Treasury secretary says that a jumbo cut of 50 basis points would be in order next month. And the US stock market has surged to an emphatic new record. (…)

The inflation numbers don’t strengthen the case for a rate cut. All else equal, they should be bad for stocks. But the intense political pressure for a rate cut has little to do with the data.

That pressure has moved the dial toward easy money. Rate cuts don’t generally happen when inflation is above target and no recession appears imminent. When they do, the stock market might well melt up. Hence Tuesday’s buying.

Last week, the nominee Fed governor, Steven Miran, told Bloomberg there was “zero macroeconomically significant evidence of price pressures from tariffs.” If there were any effect, he said, it would be a “one-time price shift,” as happens when governments raise sales taxes, and not an enduring regime change. If the administration’s message wasn’t clear enough, Treasury’s Scott Bessent piled on to say that the Fed should consider cutting by 50 basis points next month.
It’s hard to reconcile such rhetoric with the actual numbers. This is our standard beautiful chart, dividing inflation into its four core elements:

Tariffs have their most evident effect on core goods, which are scarcely visible in the big chart. Here is the sector’s contribution to CPI in isolation:

Two points are clear. First, core goods aren’t contributing much to the overall price burden. Second, their prices usually have a tendency to go down, so even if they add only two-tenths of a percentage point to bring core CPI to 3.1%, a trend has turned. It’s not terrifying, but is concerning. Some tariffed products (like home furnishings) are already showing signs that the levies are being passed through, and others (notably new cars) aren’t (…).

Omair Sharif of Inflation Insights LLC warns that of 75 items within core goods, 65.3% rose in July, up from 57.3% in June and the highest in 30 months. He suggests that a wider swathe of core goods is steadily being impacted by higher tariffs.

Services, not goods, have been leading inflation and continue to do so. Chair Jerome Powell started to look at “supercore” (core services minus shelter) as a priority, which is unfortunate as it has unambiguously turned upward, rising to 3.2% from 2.7% in April.

(…) the key is that the trend is no longer in the right direction. The same is true if we look at inflation of sticky prices, for products whose prices take a while to change and are very difficult to cut. Again, this inflation is rising again, and it never got down to the Fed’s upper bound of 3%:

The Cleveland Fed produces a median CPI, and also a trimmed mean, which excludes outliers. Both these purists’ measures of core inflation have stopped falling and started to rise, without ever getting within target range. Outside the post-pandemic spike, the median hasn’t been this high in more than three decades:

The overall numbers look good because one of the Trump 2.0 priorities, a lower oil price, is coming through in spades. Cheaper gasoline will make people much happier and brings the headline rate down to 2.7%. Exclude energy, and everything else is at 3%. It’s not at a level that would normally encourage central bankers, who generally ignore oil prices as they have no control over them, to ease rates:

(…) Wage inflation is falling, but not as fast as the Fed would like. These are the wage-tracker numbers produced by the Atlanta Fed from census data. Wages are rising, for both full- and part-time employees, faster than at any time in the 20 years before Covid:

Jim Bianco of Bianco Research makes the devastating point that in the last 40 years, the Fed has only once cut rates when the core was above 3% and the three-month change was greater than 0.3%. That was between October 1990 and March 1991 when there was war in the Persian Gulf and the economy slid into recession.

The Fed might now give up on its 2% target. There’s an argument for that, but the electorate seemed to feel differently last November, after the battering from inflation during Joe Biden’s presidency. As for stocks, everyone understands the potential of artificial intelligence. But the S&P 500 is trading at a record multiple of sales, so a lot is riding on keeping margins high:

Share prices shouldn’t be viewed in isolation. Lower interest rates justify higher valuations. But if we compare the S&P’s earnings yield (the inverse of the price/earnings ratio) with the 10-year Treasury yield, or its dividend yield with the three-month Treasury bill, stocks look terrible value. Those rate cuts really need to happen:

Tariffs’ pass-through to prices to date has been weaker than many had feared. But it’s not deranged to monitor the risks, which are clear and obvious. Whether it’s deranged to pile into stocks is another matter. With a dovish error apparently in the pipeline, maybe it makes sense.

Allow me two last charts to add to Authers’ referring to Jerome Powell’s supercore CPI.

Monthly supercore inflation has been above 3.0% annualized in 10 of the last 11 months. It averaged 3.8% in the last 6 and 3 months and 4.2% in the last 2 months. No longer in the 5%+ range of 2023 but uncomfortably high for what Powell sees as a fundamental underlying inflation indicator.

FYI, supercore inflation averaged 2.1% between 2010 and 2019:

The Partisan Economist Trump Wants to Oversee the Nation’s Data E.J. Antoni lacks the research record of previous commissioners of the Bureau of Labor Statistics, but has a solid record of backing Trump’s narrative of the economy

President Trump this week tapped Antoni to run the agency whose data and methodologies he has long criticized, especially when it produces numbers that Trump doesn’t like. He recently proposed suspending the monthly jobs report, one of the most important data releases for the economy and markets. On Tuesday a White House official noted that Antoni made the comment before he knew he was going to be chosen, and that his comments don’t reflect official BLS policy.

If confirmed by the Senate, Antoni would run a 141-year-old agency staffed by around 2,000 economists, statisticians and other officials. The BLS has a long track record of independence and nonpartisanship that economists and investors say is critical to the credibility of U.S. economic data. (…)

Past BLS commissioners have had extensive research experience, and many have climbed the ranks of the agency itself. Antoni doesn’t fit that profile. He doesn’t appear to have published any formal academic research since his dissertation, according to queries of National Bureau of Economic Research working papers and Google Scholar. Much of his commentary on the Heritage website praises Trump’s policies and economic record. He frequently posts on X and appears on conservative podcasts such as former Trump adviser Steve Bannon’s “War Room,” where he criticized the economy under President Joe Biden and lauds Trump’s economy. (…)

“It’s not a matter of making the numbers look good, it’s a matter of them being accurate,” Antoni said on Bannon’s Aug. 1 show after McEntarfer’s dismissal. “The models and the methodologies need to be revised.”

Antoni told Fox News Digital in an interview on Aug. 4 that “BLS should suspend issuing the monthly job reports” until its methodologies are corrected. Such a move would be unprecedented, leaving the public and markets without a vital source of information on the economy’s health.

His commentary on the data has been partisan. During Biden’s final year in office, Antoni argued the consumer-price index was understating inflation. In July 2024, he said its monthly rent data was “stale” and the real costs wouldn’t show up until after the election. In fact, while BLS data showed rents rising more slowly than private data in 2021-22, by 2024 the reverse was true: it showed rents up 5.2% that June from a year earlier, compared with 3.2% for Zillow.

On Bannon’s Aug. 1 show, he wrongly said that Biden had removed McEntarfer’s predecessor, Bill Beach, whom Trump appointed in 2019. In fact, Beach remained in the job until his four-year term expired in 2023, something Beach has said he was “very grateful” for.

Conservatives praised Trump’s choice. “EJ Antoni is one of the sharpest economic minds in the nation—a fearless truth-teller who grasps that sound economics must serve the interests of American families, not globalist elites,” Heritage Foundation President Kevin Roberts said in a statement.

But several independent economists said he is unqualified. “There are a lot of competent conservative economists that could do this job,” said Kyle Pomerleau, a senior fellow at the right-of-center American Enterprise Institute, in a social-media post. “E.J. is not one of them.”

Harvard University economist Jason Furman, who was chair of the Council of Economic Advisers under President Barack Obama, said on X, “E.J. Antoni is completely unqualified to be BLS Commissioner. He is an extreme partisan and does not have any relevant experience. He would be a break from decades of nonpartisan technocrats.” (…)

Also in the WSJ:

The truth is that the recent sharp downward revisions are a result of declining business survey response rates that require agency statisticians to rely more on models and guesswork. Numbers are later revised when more data is collected. Declining survey response rates are a real problem for the BLS and other federal statistical agencies.

The response rate for the BLS establishment survey, which is used for the monthly jobs report, has fallen to 43% from 61% over the last decade. Response rates for the household survey that feeds into the unemployment and labor force participation rates have declined to 68% from 88%. Inflation reports may also be affected by falling response rates in calculating shelter prices (14 percentage-point decline over a decade) and weights for items in the consumer price index (28 point decline). (…)

Another problem: A funding shortage has caused BLS to stop collecting some granular data that can illuminate economic changes. The BLS this month will stop calculating some 350 individual producer price indices showing which industries pay for goods and services. (…)

Trump Calls on Goldman to Replace Economist Over Tariff Stance Bank’s economists had predicted tariffs could cause inflation and slow economic growth

Trump said on his Truth Social social-media platform that Solomon should “go out and get himself a new Economist” because the bank made a “bad prediction a long time ago” on the market and tariffs. The president asserted that tariffs haven’t caused inflation or other issues for the U.S. economy.

He also questioned whether Solomon himself should focus on just being a DJ, a reference to the bank chief’s former side gig.

Trump appears to be referring to Jan Hatzius, the bank’s longtime chief economist, though he didn’t call him out by name or title. Hatzius is well-known on Wall Street for forecasting in 2008 that mortgage defaults could lead to a severe recession.

Hatzius and his team have been among the many economists who have predicted tariff policies would dent labor markets, cause higher inflation and slow U.S. economic growth.

A report by Hatzius and his team Sunday included an analysis that found U.S. consumers had absorbed 22% of tariff costs through June, but will eventually absorb 67% if recent tariffs follow the same pattern as earlier tariffs. This assessment is similar to those of other economists. (…)

Trump said in his post that consumers, for the most part, aren’t paying the tariffs but rather it is “mostly Companies and Governments, many of them Foreign, picking up the tabs.”

Inflation data released Tuesday showed steady increases in consumer prices, but a higher-than-expected uptick in a key measure of underlying price growth. (…)

Complicating the issue for six of the biggest banks is the fact that they are in the running to work on the Trump administration’s potential initial public offering of mortgage giants Fannie Mae and Freddie Mac. If it happens at the valuations being discussed, the offering could be among the largest of all time, which means missing out could lead to many millions in lost fees. (…)

White House to Vet Smithsonian Museums to Fit Trump’s Historical Vision

The White House plans to conduct a far-reaching review of Smithsonian museum exhibitions, materials and operations ahead of America’s 250th anniversary to ensure the museums align with President Trump’s interpretation of American history.

In a letter sent to Lonnie Bunch, the secretary of the Smithsonian Institution, three top White House officials said they want to ensure the museums present the “unity, progress, and enduring values that define the American story” and reflect the president’s executive order calling for “Restoring Truth and Sanity to American History.” (…)

Tiya Miles, a professor of history at Harvard University, said she was concerned that the Smithsonian would be asked to interpret history based on “one man’s view” as opposed to scholarship and research.

“The Smithsonian museums have never reflected one person’s view, or even one administration’s view,” Miles said. “They have reflected the composite research, analysis, discussion, findings of many different people, scholars and researchers.” (…)