INFLATION WATCH

“You can’t handle the truth!” (A Few Good Men)

“In psychology, denialism is a person’s choice to deny reality as a way to avoid believing in a uncomfortable truth. Denialism is an essentially irrational human behavior that withholds the validation of a historical experience or event when a person refuses to accept an empirically verifiable reality.”

• S&P 500 Keeps Record Momentum Alive Despite Strong PPI Data
• One Inflation Gauge Just Rose at the Fastest Rate in Three Years Wholesale inflation jumped to a recent high, likely pushing up Fed’s preferred price metric
• PPI Well Above Expectations in July (Goldman Sachs)
• Hot PPI Inflation (Ed Yardeni)

Hot indeed.

Prices charged by U.S. manufacturers and service providers rose by 0.9% month over month in July, the Bureau of Labor Statistics said Thursday, the biggest month-over-month increase since March 2022.

The increase spanned prices of wholesale goods, from food to tires, which jumped by 0.7% from a month earlier. The prices of business-to-business services were up by 1.1% in July versus June.

The data offer insight into price pressures companies themselves are facing months into a tumultuous season of on-again, off-again tariffs. Wholesale prices for computers, household appliances and furniture all climbed. (WSJ)

The data is actually worse than appears. The BLS again!!

• Final demand goods: +0.7% MoM,  +6.1% a.r. last 2 months.
• Final demand core goods: +0.4% MoM, +3.7% a.r. last 2 months.
• Final demand foods: +1.4% MoM, +9.2% a.r. last 2 months.

Let’s hope these are mainly tariff-related, potentially one-offs.

But here’s the bigger problem

The index for final demand services moved up 1.1 percent in July, the largest advance since rising 1.3 percent in March 2022. Over half of the broad-based July increase is attributable to margins for final demand trade services, which jumped 2.0 percent. (Trade indexes measure changes in margins received by wholesalers and retailers.) Prices for final demand services less trade, transportation, and warehousing and for final demand transportation and warehousing services advanced 0.7 percent and 1.0 percent, respectively. (BLS)

Wolf Street has the details:

In another inflation shocker – services again! – the Producer Price Index Final Demand for Services exploded by 1.08% in July from June (+13.8% annualized!), the worst since March 2022 when inflation was peaking (blue in the chart). It was broad based: Prices for services less trade, transportation, and warehousing spiked by 0.69% (8.6% annualized), while prices for transportation and warehousing services spiked by 1.01% (12.8% annualized).

This explosion in services prices caused the “core” PPI Final Demand, which excludes food and energy, to spike by 0.92% month-to-month (+11.6% annualized), the worst since March 2022. And it caused the overall PPI Final Demand to spike by 0.94% (+11.9% annualized), the worst since March 2022, with food prices and energy prices also surging. (…)

The tariffs are percolating through the prices that companies charge each other, but have shown up only in small increments in consumer prices, totally overpowered by the renewed surge of inflation in services, which are not tariffed, which often have little price competition, and where consumers do most of their spending. It’s services inflation at the consumer level that is so hard for the Fed to contain, which is why the Fed fears services inflation so much. (…)

The six-month average continued to accelerate and reached 3.5% annualized in July, the worst since June 2023. (…)

My observations from the CPI out Tuesday:

• Goods deflation seems over. Prices are not exploding but goods are no longer contributing to slowflation. Core goods PPI has been running at 3.7% a.r. since January, twice its 2010-2019 average.

• 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:

Pretty broad trends, especially since, unlike the CPI, the PPI does not include imports, until it does. From my July 18 post:

Some import prices: last 3m a.r., June YoY (%)

• All imports excluding food and fuels: 3.3  1.0
• Industrial supplies & materials excluding fuels: 3.7  4.3
• Industrial supplies & materials, durable: 8.5  5.7
• Unfinished metals related to durable goods: 13.0  5.7
• Finished metals related to durable goods: 19.3  12.3
• Capital goods: 3.6  1.0
• Automotive vehicles, parts & engines: 0.8  0.9
• Nondurables, manufactured: 1.6  -1.2
• Durables, manufactured: 2.0  –0.1

Wondering how PPI relates to consumer inflation. Ed Yardeni has the charts:

• Headline inflation:

• Core inflation:

Now We Know Who’s Paying the Tariffs Producer prices surge, and real wages still aren’t rising fast enough.

The WSJ Editorial Board:

(…) The producer-price data get worse the closer you look. Goods and services both experienced substantial inflation, of 0.7% and 1.1% month-on-month respectively. Goods and services related to business investment in particular are becoming pricier, with the cost of manufacturing equipment rising 0.4% in one month and related services 4.5%.

Prices for intermediate goods—components and raw materials—are also on the rise. Prices for materials used in durable-goods manufacturing increased 1.3% in a single month, and components for manufacturing increased 0.4% in the month.

This hasn’t shown up in consumer prices so far because many companies entered the Trump tariff era with large cash reserves or wider margins, so they can absorb these costs for the time being. But these companies can’t do this forever. Meanwhile, cash lost to paying tariffs or paying tariff-induced higher prices isn’t available for reinvestment in the business, or to return to shareholders. (…)

Today’s producer prices tend to become tomorrow’s consumer prices, however, so the Fed may find it has less room to maneuver than many hoped.

All of this poses a political problem for Mr. Trump and Republicans. The President promises voters that foreigners will pay for his tariff policies. These price data caution that the economy may have other ideas. Americans will pay a big chunk of the tariff bill, either directly via higher consumer prices or indirectly via less business investment in productivity growth to increase wages.

The other warning sign for Mr. Trump this week is real earnings data that’s failing to achieve lift-off. Inflation-adjusted average hourly earnings rose 0.1% in July after zero in June, and the 0.4% monthly growth in May and March could be blips instead of a trend. Real average hourly earnings rose only 1.2% over the last 12 months.

Inflation is a broad-based, persistent increase in the general price level. Tariffs in that sense aren’t inflationary unless the Fed accommodates them with over-easy monetary policy. But tariffs do raise prices on tariffed goods, which can mean a one-time surge with some potential downstream effects. (…)

Republicans are in the political danger zone if tariffs cause price increases—one-off or persistent—that aren’t offset by bigger wage gains. Republicans will make the same mistake as the Biden Administration if they keep telling voters everything is fabulous but the evidence at the grocery store or Applebee’s tells them something different.

Also in the WSJ:

(…) Barclays research suggests that inflation hasn’t increased that much partly because the U.S. hasn’t collected tariffs on many goods—for now. In June, just 48% of U.S. imports were actually subject to tariffs, thanks to myriad exemptions, according to the bank’s analysis of U.S. Census Bureau data.

Goods like pharmaceuticals, certain electronics and semiconductors and many imports from Canada and Mexico were exempted from Trump’s so-called reciprocal tariffs. There are also partial exemptions for goods with at least 20% U.S.-made components.

Ultimately, however, the actual rates importers pay are likely to rise in months to come, according to Barclays. Many of the existing loopholes could close. Trump has threatened 250% tariffs on pharmaceuticals and 100% tariffs on semiconductors. The White House has also said that as of later this month, it is suspending the de minimis exemption, which allows duty-free shipments to the U.S. as long as they are valued at $800 or less. (…)

U.S. companies imported more early in the year to get ahead of tariffs, leading to lower imports in the following months. As inventories shrink, imports are likely to rise again. “Its unclear if you can decouple from China that strongly, that quickly,” says Mark Cus, an economist at Barclays.

Barry Roth, who imports used cars from Canada for U.S. dealers, says he imported around 1,000 cars a month on average last year through November. In January, that surged to almost 1,500 as car dealers tried to get ahead of tariffs. Now, as many cars from Canada face 25% levies, he says he is lucky to import 400 vehicles a month.

But as dealers sell down their expanded inventories, they will either have to pay the tariffs or be left with fewer cars to sell. Either way, he says, prices are likely to rise. “It’s not going to happen tomorrow, it’s not going to happen next week, but it will ratchet up,” Roth says.

Meanwhile, more companies say they are increasingly likely to pass tariffs on to their customers in the months ahead. (…)

Weak demand for goods:

The  shipments component of the Cass Freight Index declined 1.8% in July m/m, and fell 1.7% m/m in seasonally adjusted (SA) terms.

• The y/y decline in shipments widened to 6.9% in July, after a 2.4% y/y decline in June.
• Tariffs hit shipments harder in the most recent data, as paybacks began from demand pull-forwards earlier in the year

Freight volumes are experiencing one of the air pockets we’ve warned about in recent months. We expect more to come after a reprieve in Q3. However, tariffs are also raising vehicle prices, and heavy truck makers are reducing production. In 2H’25, NA Class 8 production is set to fall more than 25% from 1H’25.

As the economy is likely to absorb the effects of tariffs over the next several months, our freight demand outlook remains cautious.

• What Declining Cardboard Box Sales Tell Us About the US Economy

A nontraditional economic indicator, sales of the corrugated cardboard used to make the boxes that transport everything from doughnuts to dishwashers are slumping, signaling that retail demand across industries may be due for its own correction in the not-too-distant future.

US box shipments—that is, volumes of empty packaging materials sold to retailers, which in turn use them to ship orders to warehouses, storefronts and Americans’ doorsteps—fell to the lowest second-quarter reading since 2015.

Memphis-based International Paper Co., one of the world’s largest pulp and paper companies, reported a 5% drop in daily US box shipments in the quarter from the same period a year ago, while packaging giant Smurfit Westrock Plc, based in Dublin, saw a 4.5% slide in North American corrugated cardboard volumes, the biggest drop across all of the regions it operates. “If volume picked up in the United States, that would give us more confidence, but we haven’t seen that yet,” Chief Executive Officer Anthony Smurfit said on a recent earnings call. (…)

Organic growth in consumer goods “is just not happening,” says Ryan Fox, a Bloomberg Intelligence analyst. At the grocery store, for instance, Fox says he now sees buy-two-get-two—or even get three—promotions to drive volumes, never a great sign for demand. At the same time, low housing turnover means consumers aren’t buying as many big items like (boxed) refrigerators and loveseats to fill their new spaces, says Adam Josephson, a former sell-side analyst who covered the paper and packaging sector for over a decade before starting his own newsletter. (…)

In short, it’s not looking great out there for box manufacturers. “They are very much hoping that box demand will get better, but it’s just not happening, and they have no control over it,” Josephson says. Across industries, “all the measures I track are pointing in a not-very-good direction.”

• Global Trade Slowdown Coming: FedEx’s stock price is a leading indicator of global trade.

China’s Economy Slows Sharply as Trade War Bites

Production at Chinese factories and mines rose at the slowest rate since November and expanded a worse-than-forecast 5.7% last month from a year earlier, according to data released by the National Bureau of Statistics on Friday, compared with June’s gain of 6.8%.

Retail sales grew 3.7% on year in July, the least this year and down from 4.8% in the previous month. Expansion in fixed-asset investment in the first seven months of the year decelerated to 1.6%, as a contraction in the real estate sector deepened. The urban unemployment rate climbed more than expected to 5.2%. (…)

The disruptions in July, caused by high temperatures, unusually heavy rain and flooding in large swathes of China, added to what’s traditionally a slow season for the economy.

Growth in yuan-denominated new loans contracted for the first time in 20 years in the month, highlighting subdued willingness for borrowing and spending. (…)

Investment in manufacturing, property and infrastructure fell across the board in July, which was “extremely rare,” according to Jacqueline Rong, chief China economist at BNP Paribas SA.

The effort to curb so-called involution drove local governments to “strictly control” new investment in industries suffering from intense competition or having overcapacity concerns, holding back spending in manufacturing, she said. (…)

There are signs the government’s consumer subsidies are also having less impact on boosting demand, as retail sales of household electronics, office supplies and furniture slowed in July from a month ago. Car purchases fell 1.5% from a year earlier, the first drop since the January-February period.

Some local governments ran into a funding shortage for the subsidy program starting from June, before the country’s top economic planning agency allocated more money to them around late July. (…)

Private capital expenditure declined 1.5% in the first seven months from a year ago, the worst reading for the cumulative gauge since September 2020. (…)

• China New-Home Prices Drop as Stimulus Fails to Halt Slide

New-home prices in 70 cities, excluding state-subsidized housing, dropped 0.31% from June, the biggest decline in nine months, National Bureau of Statistics figures showed Friday. Resale home-value slump narrowed to 0.55%, compared with 0.61% in June. (…) All four tier-1 cities saw their existing-home values drop at least 0.9% from a month earlier. Market watchers have pinned recovery hopes on the top cities. But it was actually tier-2 and tier-3 cities where price declines have narrowed, thanks to local authorities rolling out more easing measures. Real estate investment tumbled 12% in the first seven months, marking a new low since the start of the pandemic. (…)

• Swiss Economy Slows Sharply as Tariffs Weigh GDP rose 0.1% in the three months to the end of June, down from 0.8% growth in the first quarter
• Japan’s Economy Records Modest Growth Despite Trade Uncertainty Real gross domestic product increased 0.3% on a quarter-over-quarter basis in the April-June period
• Eurozone Industrial Production Slumps More Than Expected as Tariff Effects Sting
• German Factory Orders Dip as Sluggish International Demand Weighs Factory orders fell 1.0% on month in June, after a 0.8% decline in May
• Ireland’s Economy Contracts as U.S. Front-Running Cools
• Russia’s Central Bank Cuts Key Rate Again as Economy Slows
• Malaysia Warns of Export Slowdown After Economy Grows 4.4%

White House loyalty rating for companies

The West Wing has created a scorecard that rates 553 companies and trade associations on how hard they worked to support and promote President Trump’s “One Big Beautiful Bill,” a senior White House official tells Axios.

Trump works transactionally, and companies have rushed to pay demonstrative homage. Now, senior aides will have data to consult when considering corporate requests. The unusual spreadsheet fits this administration’s proclivity for micromanaging companies and administering loyalty tests.

Factors in the rating include social media posts, press releases, video testimonials, ads, attendance at White House events, and other engagement related to “OB3,” as the megabill is known internally. The organizations’ support is ranked as strong, moderate or low. (…)

The ranking “helps us see who really goes out and helps vs. those who just come in and pay lip service,” the official said. (…)

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.  (…)