More Tariff Shock To Come? June Inflation Numbers Reveal Alarming Trend | What's Moving Your Money

Key Concepts

• Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
• CPI (Consumer Price Index): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
• Basis Points: One hundredth of one percentage point, used in finance to denote changes in interest rates and other percentages.
• Year-over-Year (YOY): Comparing a statistic for one period (month, quarter, or year) to the corresponding period in the previous year.
• 60/40 Portfolio: A traditional investment strategy that allocates 60% of the portfolio to stocks and 40% to bonds.
• Tariffs: Taxes imposed on imported goods and services.
• Bond Yield: The return an investor realizes on a bond.
• 30-Year Yield: The yield on a bond that matures in 30 years.
• Rate Cuts: A reduction in the target federal funds rate.

Inflation Numbers and Trends

• June CPI: Inflation grew at an annualized rate of 2.7%, exceeding estimates of 2.6%.
• Inflation Trend: Inflation has been increasing: April (2.3% YOY), May (2.5% YOY), and June (2.7% YOY). This upward trend is concerning.
• Historical Context: The speaker draws a parallel to 2021-2022, where inflation gradually rose to 9%, emphasizing that inflationary pressures build over time.

Impact of Inflation

• Economic Impact: Inflation is "devastating for an economy" and negatively impacts asset markets.
• Portfolio Impact: Inflation harms the 60/40 portfolio, as bonds perform poorly during inflationary periods.
• Social Impact: Inflation disproportionately affects older people, poorer people, and those on fixed incomes, making it politically unpopular.
• 2022 Financial Markets: The speaker notes that 2022 was the worst year for financial markets since 2008 due to inflation.

Specific Categories Experiencing Inflation

• Surging Categories: Apparel, furniture, electronics, and home goods are experiencing rapid inflation.
• Inflation Rate: These categories have seen a cumulative 5% inflation from April 1st to the end of June.
• Annualized Rate: This equates to an annualized inflation rate of approximately 20% for these categories.
• Tariff Connection: The speaker believes this inflation is partly due to tariffs on goods from China, Vietnam, India, and Bangladesh.
• Company Behavior: Companies may be taking advantage of tariff headlines to raise prices, even when tariffs are paused.
• Price Stickiness: Prices rarely fall once they rise, meaning initial tariff-related price hikes may persist.

Market Pricing and Bond Yields

• Market Wisdom: The speaker emphasizes the importance of market prices as a reflection of collective market sentiment.
• Bond Yield Spike: The 30-year yield rose above 5% for the first time since June, indicating market concern about inflation.
• Scott Besson: The speaker references Scott Besson's influence on President Trump to back off tariffs when the 30-year yield rose above 5%.
• Impact on Lending: The 30-year yield is crucial because many long-duration loans (home, auto, business) are based on it. Rising yields increase borrowing costs.
• Economic Concerns: Rising bond yields exacerbate existing economic challenges, such as a slowing consumer and a frozen housing sector.

Tariff Concerns

• Tariff Lull: The recent inflation numbers occurred during a period of relative calm regarding tariffs.
• Renewed Tariff Threats: The speaker notes that new tariffs are being considered for various countries (Brazil, South Africa, Canada, Europe, Mexico, Indonesia).
• Inflationary Risk: The speaker questions how inflation can be contained if tariffs are implemented, particularly in the electronics, apparel, and home goods sectors.
• 30-Year Yield Target: The speaker raises the possibility of the 30-year yield climbing towards 6%.

Fed Rate Cuts

• Trump's Proposal: President Trump has suggested a 300 basis point rate cut, which the speaker dismisses as unrealistic.
• Economic Rationale: Cutting rates with rising inflation is a "formula for disaster" and could lead to a lost decade similar to the 1970s.
• Consequences: Such a move could trigger runaway inflation, loss of monetary policy credibility, and a significant devaluation of the dollar.
• Market Expectations: The market currently prices in two rate cuts for 2025, but the speaker doubts this will happen.

Bank Earnings

• Upcoming Episode: The next episode will focus on bank earnings, which are considered a crucial indicator of the overall economy.
• Bank Importance: Commercial banks have a broad impact on the economy, making their earnings and executive commentary valuable.

Conclusion

The speaker believes that inflation is making a comeback, as evidenced by recent CPI data and trends. Rising inflation, particularly in specific sectors like apparel, furniture, electronics, and home goods, is concerning. The speaker connects this inflation to tariffs and warns of potential economic consequences, including rising bond yields and a slowing economy. The speaker dismisses the possibility of significant Fed rate cuts in the near future, arguing that it would be detrimental to the economy. The speaker emphasizes the importance of proactive analysis and vigilance in monitoring these trends.