Supply Shock & Inflation: Traditional turn of the year price increases, the lagged impact from tariffs with a layer of inflation driven by the adverse supply shock unleashed by the war is making for a very mean year.
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Think tariffs don't cause inflation? Think again take a look at the cost of goods sensitive to tariffs. Remember that many firms pulled forward inventory accumulation into early 2025 to avoid trade taxes. Those inventories are being rebuilt now with the trade taxes layered on top. More inflation is incoming.
Don't like core PCE because it does not fit your narrative? Ok, take a look at the topline. Note that three month average at an annualized pace. Remember that this is the Fed's metric that they use to make policy.
My preferred metric to set policy would be core PCE which is up 3.2% from one year ago, 3.7% on a six-month annualized pace and 4.4% on a three-month annualized rate.
Given the supply shock and the probability, the war will not be wrapped up soon I think that investors have not properly priced in risk of a rate hike as soon as the June meeting
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