Inflation Watch

The monthly CPI (consumer price index) numbers seem to get more and more attention every month.

A big reason is that the Fed has been reluctant to lower interest rates until it sees inflation returning to at or below its 2% annual target.

A lot of progress has been made since the U.S. was experiencing a 9.1%  annual inflation rate in June, 2022.

However, Fed Chairman Powell has stated that uncertainty about any inflationary effects of the Trump tariffs are preventing the Fed from making any changes in the Fed rate.

The July CPI number that was released earlier this week had inflation rising .2% for the month.

That rate was actually lower than the .3% in June.

The 12-month CPI number is at 2.7%.

Both numbers were better than expected.

What I found interesting in the CPI print was that, despite all of the concerns about the tariffs being inflationary, the inflation we are seeing is being driven primarily by items that are not subject to tariffs.

In fact, most of the larger increases involve services rather than goods.

Shelter                                                                    +0.2%

Medical services                                                   +0.8%  

Dental services                                                      +2.6%

Tuition and child care                                          +0.4%

Used cars and trucks                                            +0.5% 

Garbage and trash collection                               +0.6% 

Tax preparation and accounting services.        +3.5%               

Airline fares                                                             +4.0%

On the other hand, there was no inflation in categories we are told would become more expensive due to tariffs.

Food at home                                                        -0.1%

Appliances                                                             -0.9%

Toys                                                                        -0.2%

Apparel                                                                   0.1%

Gasoline                                                                 -2.2%

Computers, phones and tech hardware            0.0%

Housekeeping supplies                                        0.0%

New vehicles                                                          0.0%

Could it be that the tariffs do not have anywhere near the impact on inflation compared to the money printing that the Federal Reserve has done?

The Fed was tightening for about 18 months after the insane amounts of money that were pushed into the economy during Covid. That ceased in early 2024.

The money supply is increasing again at the highest rates since July, 2022.

Source: https://fred.stlouisfed.org/series/M2SL

In fact, it took over 200 years for the money supply of the United States to reach $11 trillion.

The money supply has now increased by that amount in a span of less than 12 years.

Credit: https://x.com/JeffWeniger/status/1955427834018795939

It will be interesting to watch the inflation data in succeeding months but to this point it is difficult to see that the tariffs are having much effect on the inflation numbers.

The PPI (producer price index) came in for July at a higher rate (3.1% year over year) than the CPI number and suggests that consumer prices may be headed higher in the next few months. The monthly increase was also the highest seen since June, 2022.

We will have to see how that develops.

However, the money supply that the Fed controls clearly had everything to do with the inflation we saw in the aftermath of Covid. 

Are the increases in the money supply we have seen recently having a greater effect on inflation than the tariffs?

Let's not forget what Nobel Prize winning economist Milton Friedman said on the subject of tariffs many years ago.

Is the Fed watching what really matters regarding inflation?

Who is it that controls the money supply?