Yesterday, reading Wall Street pundits’ reactions to the August CPI, the words complacency and wishful thinking crossed my mind several times. The WSJ Editorial Board feels the same:
Sorry, Inflation Still Lives Consumer prices in August show a Fed rate cut isn’t an easy call.
Our friends on Wall Street and in Washington keep saying that inflation is vanquished as they hope—plead—for lower interest rates. Yet the economic data aren’t bearing out their optimism, as the Labor Department’s consumer price report for August revealed on Thursday.
Consumer prices climbed 0.4% in August and 2.9% over the past year, both the most since January. Price increases last month were broad-based, hitting food consumed at home (0.6%), alcohol (0.6%), children’s shoes (1.5%), clothing (0.5%), new cars (0.3%), used cars (1.0%), housing (0.4%), hotels (2.6%), vehicle repair (5.0%), air fares (5.9%) and more.
The index for so-called core prices (less volatile food and energy) wasn’t more reassuring. Those prices rose 0.3% in the month, or 3.1% over the last 12 months. The fall in inflation from March through May turned into a modest re-acceleration in the summer.
President Trump’s tariffs are clearly driving up some prices, especially in food and goods. Imports account for about 20% of food and beverages in the U.S. Goods prices had been quiescent in recent months while services inflation was high, but prices rose for both last month.
Businesses report that they’ve run through inventory they stockpiled before Mr. Trump’s tariff barrage and are starting to pass on their higher costs to customers. Auto-repair shops are getting whacked by Mr. Trump’s 25% tariff on parts and 50% on steel and aluminum. The tariffs could also have indirect effects. Used cars prices are increasing because the supply has shrunk as people hold onto their jalopies longer because they can’t afford new cars.
At the same time, Mr. Trump’s restrictive immigration policies are contributing to labor shortages, which may be pushing up wages and prices in industries like agriculture, construction and hospitality. One “agribusiness reported that wages rose 8 to 10 percent annually, yet turnover remained high,” a Federal Reserve business survey noted last week.
Buoyant consumer spending, rising prices, and frothy stock valuations suggest that current interest rates aren’t all that restrictive. While many lower and middle-income Americans are stretched, ebullient markets may in part be fueling more spending by the affluent and creating a wealth effect.
A BlackRock portfolio manager told Bloomberg News last week that a boost to wealth from soaring asset prices “is supporting consumption and that is what drives the economy more than anything else.” What’s fueling stock prices? In part expectations that the Fed may cut rates sharply this fall because of signs the labor market is weakening.
All of which makes next week’s meeting of the Federal Open Market Committee more difficult than Wall Street hopes. A 25 basis-point cut is probably in the bag after last week’s labor report showed a summer stall in job creation. But the Fed has to worry about persistent inflation above its 2% target. Easier money may help Wall Street, but it won’t counter the economic policy mistakes that are to blame for Main Street’s malaise.
A few numbers:
- Core CPI rose 0.3%, like in July. It was really +0.35% after +0.32%. In annualized terms: +4.2% after +3.9%. Q2 was +2.1% after Q1 of +3.5%.
- CPI Services rose 0.35% (+4.3% a.r.) after +0.36% (+4.5%). Q2 was +2.6% after Q1 of +4.0%.
Better be one-offs…
Meanwhile, unemployment claims jumped last week. Getting serious or another one-off like Ed Yardeni hopes?
Wage Growth Tracker Was 4.1 Percent in August
The Atlanta Fed’s Wage Growth Tracker held at 4.1 percent in August. For people who changed jobs, the Tracker increased to 4.4 percent in August from 4.0 percent in July. For those not changing jobs, the Tracker declined to 3.8 percent in August from 4.1 percent the prior month.
Switching: +4.4% vs staying: +3.8%. Must be another one-off…
If the labor market is weakening, like most people say, it’s not showing in weaker wage gains. Lower demand meets lower supply.
China Warns Mexico Against Tariffs That Could Harm Chinese Goods Mexico is a major consumer of Chinese-made cars, which accounted for around a fifth of new car sales in the country
Beijing has warned Mexico to think twice before moving ahead with a plan to raise tariffs that could hurt Chinese automakers, saying it would retaliate against the measure.
“At a time when the U.S.’s abuse of tariffs has sparked widespread global opposition, countries should strengthen communication and coordination to jointly safeguard free trade and multilateralism, and must not sacrifice the interests of third parties due to coercion,” a Chinese commerce ministry spokesperson said in a statement released late Thursday.
Any unilateral tariff increase by Mexico would be seen as appeasement and compromise with “unilateral bullying,” the spokesperson said, adding that China will take necessary measures to safeguard its rights and interests. (…)
Mexico is in a tricky spot as so much of its economy is reliant on exports to the U.S., said Joe Mazur, senior analyst at Trivium China. If forced to choose, it probably sees U.S. tariffs as a bigger economic threat than any retaliation from China, he added.
Beijing too is facing a dilemma.
“If they don’t do anything or not do something strong enough, it will set a precedent where it’s alright for the U.S. to effectively pressure third countries to sell out China’s economic interests; but at the same time, if they retaliate too forcefully, they are put in a position where they will be spooking other trade partners,” the analyst said. (…)
IT’S THE ENERGY, STUPID!
China’s Wind, Solar Ambitions Bring Energy Holy Grail Closer
China’s energy transition appears to be at an inflection point this year, with wide-ranging repercussions both for itself and the rest of the world.
It has recently become clear that record additions of wind turbines and solar panels are producing so much electricity that the nation’s huge fleet of coal power plants doesn’t need to burn as much fuel. That would put greenhouse gas emissions on the decline — accomplishing a key goal of policymakers in Beijing.
At the same time, China’s world-leading clean tech companies are increasingly looking abroad, exporting power equipment and building factories overseas.
The upshot is that the country may have already hit peak emissions five years before its own target, and the world at large could start reducing fossil fuel use by 2030. (…)
China views its energy transition as more than just a climate issue. It wants its power to be clean, sure, but perhaps more importantly it wants it to be cheap, abundant and reliable even in the face of growing geopolitical strife.
The power system it has built to that end is huge. In fact, it has more than double the generating capacity of the US. China used more electricity in July than Japan used all of last year. In the first six months of the year, it installed more solar panels than Germany, France and Spain have added in their entire history combined. (…)
Only a few years ago, offshore wind conjured visions of a future with near-limitless supplies of clean energy. Those hopes are fading in much of the world, as rising costs and outright hostility from the Trump administration cause delays and cancellations.
But in China, government support has helped keep the industry alive. (…)
For China, that would mean its companies never want for energy. That matters because growth sectors like artificial intelligence, robotics and advanced manufacturing will require massive amounts of electricity, and making sure that power is cheap and available will give the firms a step up in international competition.
In the US, planners and utilities that had two decades of stagnant power demand are now facing stress from rapidly rising consumption from data centers. Grids are scrambling to avoid blackouts, while tech giants are making their own investments in power plants to ensure they have enough electricity for future growth. (…)
This summer, peak electricity demand hit a new record about 100 gigawatts higher than the previous year — the equivalent of all the power plants in the UK combined. Thing is, China had added nearly 500 gigawatts of generating capacity last year so the new peak was met with little drama.
Even with its successes to date, China will face new challenges to keep its transition on track. It needs to increase spending on power lines and energy storage to make sure renewables can be used when the sun isn’t shining and wind isn’t blowing. (…)
Right on cue:
China Aims to More Than Double Energy Storage Capacity by 2027
China plans to more than double its energy storage capacity in the next two years to further accelerate the deployment of renewables.
The country aims to have more than 180 gigawatts of battery capacity by 2027, which should drive an investment of 250 billion yuan ($35.1 billion), according to a work plan issued by the National Development and Reform Commission and the National Energy Administration for the period between 2025 and 2027.
The battery systems, known in China as “new type” of storage to set them apart from hydro-pumped technology, should ensure smooth grid integration of renewable power from intermittent sources such as solar and wind.
China is already the largest battery storage market in the world. As of March, 76.9 gigawatts of projects were built in the country, according to BloombergNEF.
Last June, BloombergNEF expected the global energy storage market to grow by 94 and 220 gigawatts respectively in 2025 and 2026. Now China alone aims to reach 180 gigawatts by 2027. The red bar would totally dominate this BB chart, dwarfing the blue one…
Meanwhile, BB continues:
In the US, BNEF’s expectations cooled as higher tariffs on imports are driving up battery prices and slowing build. The US energy storage market is feeling the pain from higher import tariffs on goods from China, Canada, and Mexico, with President Donald Trump raising import tariffs since he returned to the White House this year.
The tariff timeline is such that Trump increased base tariffs by as much as 145% on imports from China on April 10. BNEF’s base-case analysis looks at a blanket 54% import tariffs, which immediately inflate four-hour turnkey system costs by 30% in 2025 (to $266 per kilowatt-hour) compared to without the raised tariff. BNEF’s higher tariff scenario, at 145%, leads to between 51% and 74% lower build annually between 2025 and 2027 relative to BNEF’s base-case scenario.
With higher-than-expected costs, supply contracts are being renegotiated, projects are being delayed and canceled. These tariffs also increase production costs of US-made batteries as the US still needs to import battery materials, including graphite, from China for domestic battery production. (…)
The impact of very high tariffs on imports from China, where the vast majority of LFP [lithium iron phosphate] batteries is manufactured, will reduce demand for energy storage in general in the US (…).
Another critical technology where the US is trailing. Trump’s policies against renewable energy will aggravate the US declining competitiveness in energy costs. From another BB analysis:
China’s abundance of clean-tech manufacturing capacity was a key driver behind cost declines last year and has a major impact on project economics at home and abroad. On average, the country can produce a megawatt-hour of electricity from major power-generating technologies 11-64% cheaper than other markets.
For example, power generated from onshore wind turbines costs around 24% less than the global benchmark of $38 per megawatt-hour. While wind turbine prices in China have been falling, they have increased elsewhere since 2020.
From the Rocky Mountain Institute (RMI), an independent, nonpartisan nonprofit organization:
Prices for renewable energy, meanwhile, continue to fall. Wright’s Law explains why some technologies get cheaper as production increases, with learning rates that remain remarkably consistent across decades. Such is the case for wind, solar, and batteries, as shown by recent reports from the UN and International Renewable Energy Agency. With global cost declines of 2.5x–4x over the past decade —and 9x for battery storage — clean energy systems are increasingly affordable around the world.
With natural gas prices rising, and the costs of renewables declining, markets are quickly tipping. Before 2018, most clean energy projects were more expensive than their fossil fuel alternatives (on a levelized cost basis). But in 2024, more than 90 percent of installed renewable energy capacity was cheaper. Nearly all nations see the cheapest new capacity from solar or wind, and nearly half the world’s electricity demand comes from countries where solar-plus-storage already beats fossil fuels on price.
In 2024, solar and wind energy costs were between 25% and 60% cheaper in China vs in the US. Increasingly able to store cheaper renewable energy, China will access more lower cost electricity than most other countries.
The cost gap with the US is already enormous:
Average household electricity prices in China
(Statista)
AI, particularly large language models (LLMs), requires enormous computational resources. Training these models involves thousands of graphics processing units (GPUs) running continuously for months, leading to high electricity consumption. By 2030–2035, data centers could account for 20% of global electricity use, putting an immense strain on power grids and overall energy prices.
The concentration of energy demand in data centers places significant strain on local electrical grids, requiring substantial investment and time to upgrade infrastructure and ensure reliable power supplies.
A lack of accessible, affordable, and sustainable energy can become a major bottleneck, potentially limiting the scope and speed of AI adoption and development.
In essence, energy is the fuel that enables AI, and the rapidly growing demand for it presents both a significant challenge and an opportunity to innovate and manage energy systems more efficiently.
China has a comprehensive plan, unlike the US.
Canada Explores Legal Carveouts for New Oil Export Pipeline
(…) Currently, almost all of Alberta’s oil exports flow south to the US, and there’s only one pipeline capable of feeding tankers for Asian markets. That’s one reason Canadian heavy oil trades at a discount to West Texas Intermediate — and that dependence on the US market has become a problem in light of President Donald Trump’s tariffs. (…)
Prime Minister Mark Carney wants to speed construction of a major expansion of LNG Canada, a large-scale liquefied natural gas export project on Canada’s west coast.
Shell Plc and its Asia-based partners are considering whether to go ahead with a doubling of LNG Canada’s capacity. The prime minister announced Thursday he plans to smooth the path by including it on a list of projects eligible for fast-track acceptance, confirming an earlier report by Bloomberg News.
The list, which Carney has referred to as a “first tranche,” includes projects the government sees as nationally important and wants to expedite. It’s part of an effort to respond to US tariffs by stimulating construction activity, boosting Canada’s economy and increasing exports to non-US trade partners. (…)
The LNG Canada expansion already has federal approval, but Shell and its partners — Petronas, PetroChina Co., Mitsubishi Corp. and Korea Gas Corp. — have not yet made a final investment decision.
Canada seems to have a plan.