Last
week, two key U.S. inflation reports came out: the consumer price index (CPI)
on Tuesday and the producer price index (PPI) on Thursday, both for July. While
the former data showed a moderate increase in line with expectations (0.2%
month-on-month for the overall CPI and 0.3% for the core CPI), the PPI figures
surprised on the upside: 0.9% month-on-month versus 0.2% expected, with the
core PPI showing the same increase.

This
suggests that Trump’s trade tariffs are, in fact, driving up prices. At
first, U.S. companies were absorbing the higher import costs, but now they have
begun to gradually pass them on to consumers, something that both the Federal
Reserve and independent economists expected. As for whether most of the impact
has already been priced in, the latest Beige Book suggests that more companies
could raise prices.

Which of
these indicators matters more?

As the
CME Group points out, since the PPI measures the production costs of consumer
goods and raw materials, and food prices directly affect retail prices, the PPI
is often considered a leading indicator of inflationary pressures. In other
words, when producer costs rise (PPI), those increases are usually passed on to
consumers (CPI). That means the August CPI report could end up hotter than the
market expects.

It is
also worth noting that inflation expectations are rising. According to the
University of Michigan survey, one-year inflation expectations rose from 4.5%
to 4.8% in August, and five-year expectations rose from 3.4% to 3.9%. This is
important because when people expect prices to rise, they often do: companies
raise prices, workers demand higher wages, and the cycle feeds real inflation.
Still, there’s a bit of relief in the fact that crude oil prices have
stayed relatively low.

What
does all this mean?

In
short, nothing good, especially for the Fed. On the one hand, they’re under
pressure to cut interest rates to support a labor market that’s suddenly
looking shaky. On the other hand, inflation remains a problem due to trade
wars. That’s a recipe for stagflation, where the economy slows down but prices
keep rising. Let’s see if Jerome Powell’s speech this Friday in Jackson Hole
sheds more light on the direction of monetary policy.

That
said, the stock market does not seem overly concerned. The S&P 500 and
Nasdaq have only cooled off slightly. This calm seems to be driven by two
factors: A) the hope that the Federal Reserve will cut interest rates in
September, and B) the fact that previous declines have recovered quickly.
Still, while investors stay optimistic, some signals — like the Buffett
indicator — suggest the market may be in bubble territory.