YOUR DAILY EDGE: 15 August 2025

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. (…)