Welcome to a regular snapshot-review of U.S. (and sometimes international) economic data that aims to 1) determine the direction of economic policy — such as the speed at which the Federal Reserve decides to raise interest rates, 2) provides a window into the challenges and decisions facing businesses today, and 3) assess what the impact will be for consumers.

The onset of a trade war between the United States and China, and the looming prospect of a similar conflict between the U.S. and allies such as Canada and the European Union, has sparked dire predictions for the future pace of economic growth.

In particular, the expectation is the punitive tariffs on imports to and from the U.S. will mean significantly higher costs for companies, who will then charge consumers more to offset the impact. Theory dictates that a rapid surge in prices will spur the Fed to raise short-term interest rates much faster than its current sedentary pace — unless the central bank bows to political pressure — to keep inflation in check.

Government data release this week showed U.S. wholesale prices jumped by a staggering 3.4% in June compared to the same month a year ago, the largest such increase since November 2011. Excluding food, energy, and trade services, the Producer Price Index in June was up 2.7% from a year ago.

Evidence of the impact from the recent aluminium and steel tariffs can already be seen in the wholesale auto prices, with the Bureau of Labor Statistics noting that:

“A major factor in the June increase in prices for final demand goods was the index for motor vehicles, which moved up 0.4 percent.”

This sentiment was made clear in the minutes of the June meeting of the Federal Open Market Committee — the group of senior Fed officials that is responsible for setting interest rate policy. Published on July 5, the group noted during their deliberations:

“…many business contacts indicated that they were experiencing rising input costs, and, in some cases, firms appeared to be passing these cost increases through to consumer prices.”

U.S. consumer prices rose 2.9% for the 12 months ending June; the
largest 12-month increase since February 2012. Excluding food and energy prices, the Consumer Price Index rose 2.3% from June 2017.

The Fed might be willing to tolerate inflation above its 2% target temporarily to support strong economic activity, but one wonders how long Fed Chair Jay Powell and his colleagues will maintain that stance in the face of falling unemployment and rising labor shortages — a combustible combination for wage inflation.

The trucking industry is one example where employers are struggling to fill vacant positions, and driver shortages have sent costs “sky-high”. BLS data show prices for truck transportation of freight jumped 1.3% from May to June, and are up a massive 7.7% compared to June last year.

More broadly, the BLS’ monthly ‘Job Openings and Labor Turnover Summary’ report this week showed 6.6 million job openings at the end of May compared to just 5.8 million hires.

With a ‘job openings’ rate of 4.3% compared to the 3.9% ‘hires’ rate, it becomes a question of when, not if, increasing import duties (higher prices) and a tighter labor market (rising wages) combine to fuel inflation and clamp down on economic activity — causing the Fed to ponder: “To hike or not to hike?”

That is the question.

Founder — SW4 Insights. Public policy junkie and Central Bank Watcher. Recovering journalist and former Senior Director at Hamilton Place Strategies

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