The narrative out of the White House is that tariffs are not an inflation driver. I would argue they are a stagflation driver in isolation, but there are other policies associated with the tariffs that are boosting growth.
Stronger growth typically will put upward pressure on inflation. U.S. inflation numbers should start to creep higher. Last week, we saw another move higher in the ISM services survey. Companies are telling us they are paying more for inputs.
The chart below shows that the correlation between the ISM services prices paid index and U.S. consumer price index (CPI) can’t be ignored. The only debate is the beginning, magnitude and duration of the coming increase to CPI.
U.S. President Donald Trump’s newest nominee for governor of the Federal Open Market Committee (FOMC), Stephen Miran, chair of the Council of Economic Advisors, is one of the architects and advocates of the restructuring of the global trading system.
We highly recommend reading his paper on the subject to get a better understanding of what the U.S. administration is trying to accomplish.
The major catalyst driving the MAGA movement is likely centered around good paying manufacturing jobs that have been gutted for decades from the U.S. economy. This weakening of the “middle class” is not a new story.
But Trump has leveraged it once again and he’s using tariffs as the major lever in reversing the trend. Most economists believe it will have a more than transitory impact on prices.
Clearly, the Jerome Powell led FOMC believes it should be taking a wait and see approach. Depending on who the next chairman will be and if U.S. Congress changes the U.S. Federal Reserve’s mandate will define policy in the future.
For the next few quarters, the market will likely be focused on pending inflation, the degree to which corporate America will absorb higher costs versus passing them on to consumers and all the knock-on effects this drives, and what all that means for the multiple we pay for the market.
I remain cautious as the stagflation risk remains high.
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