Must Read: What to Make of This Week’s Inflation Reports Amid Ongoing Tariff News…
RJ Hamster
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February 14, 2025
What to Make of This Week’s Inflation Reports Amid Ongoing Tariff News…
Dear Reader,
President Trump made headlines again with a new round of tariff measures. The President signed a plan for “reciprocal” tariffs against a host of allied countries, but they will not go into effect immediately.
Instead, a study of trade practices will commence on a one-by-one basis before negotiations take place. As the memo states, “The Plan shall ensure comprehensive fairness and balance across the international trading system.”
In other words, Trump is threatening reciprocal tariffs on Europe and other countries right now. But if they cut their tariffs to U.S. levels, then there’s no tariff. If they insist on taxing American goods at a higher rate than we tax theirs, well, guess what’s going to happen?
We’re going to raise our tariffs to their levels.
Now, this comes after the president announced new 25% tariffs on steel and aluminum earlier this week as well as 10% tariffs on China last week over issues of illegal drugs and migration. (We covered this in a previous Market 360 here.)
But as I have said all along, what people need to understand is that this is how Trump operates. He wants to make you uncomfortable, negotiate from a position of strength and win.
Still, I understand that these tariff threats have continued to attract their fair share of attention this week.
In fact, our friends at FactSet recently conducted a search and found that 146 companies mentioned tariffs in their earnings calls from December 15 to February 6. This marks the highest number of S&P 500 companies citing “tariff” or “tariffs” on quarterly earnings calls since the second quarter in 2019.
As you can imagine, the Federal Reserve has its eye on tariffs, too. Chair Jerome Powell spoke in front of Congress this week, and while he refrained from directly commenting, he stood by his comments during the first Trump administration that countries that remain open to trade have stronger economies.
When it came to key interest rate cuts, Powell also reiterated that they are in no rush:
With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.
Essentially, the Fed is in a waiting period because they want to see how these tariffs will impact inflation. And the truth is, we need to wait several months to see the true impact of any tariffs in the inflation reports.
Regardless, this was the backdrop for the latest inflation reports this week, as the Consumer Price Index (CPI) was released on Wednesday and the Producer Price Index (PPI) was released yesterday.
Now, ideally, we will see further progress, especially in the CPI, before the tariffs are enacted. But I have gone on record to say that I don’t think that these tariffs will be inflationary. But again, the Fed wants to wait and see.
So, with that in mind, I want to use today’s Market 360 to dive into these inflation reports and what they tell us. Then I want to take a moment to share a game-changing shift that is emerging in the markets.
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Unpacking the Inflation Reports
Consumer Price Index
Both CPI and core CPI, which excludes food and energy, were substantially higher than economists’ expectations. The Labor Department reported yesterday that CPI rose 0.5% in January and rose 3% in the past 12 months. That’s just a bit above the rate in December. Economists had forecast a 0.3% rise and a 2.8% year-over-year increase.
Core CPI, which excludes food and energy, rose 0.4% in January and was up 3.3% over the last year. Expectations were calling for a 0.3% monthly rise and a 3.1% yearly increase.
Digging a little deeper into the numbers, food prices were up 0.4%. This was driven largely by the 15.2% surge in egg prices as the avian bird flu continues to wreak havoc on chickens. In fact, the report noted that this was the largest increase in egg prices since June 2015.
The other big news was Owners’ Equivalent Rent (OER), or shelter costs. The index rose 0.4% in January, accounting for nearly 30% of the entire increase. The fact is, OER has been a sticky point for consumer inflation, and it continues to be a significant reason why inflation has yet to reach the Fed’s 2% target.
So, simply put, this pickup in inflation complicates the Fed’s rate cut plans. Even though the Fed removed its inflation target language from its most recent statement, we still need to see more progress.
Producer Price Index
Yesterday’s PPI report was also a bit of a disappointment. But there were some green shoots.
PPI rose 0.4% in January and is up 3.5% in the past 12 months. Economists were expecting a 0.3% increase in June. Core PPI, which excludes food, energy and trade margins, was up 0.3% in January which was in line with estimates.
Diving into the details, service costs increased 0.3% for the month, marking the sixth consecutive increase. Over one-third of this rise can be attributed to prices for traveler accommodation services, which jumped 5.7% in January.
Meanwhile, goods rose 0.6% which was the fourth consecutive rise. And over half of this increase can be traced to energy’s 1.7% increase in January. In fact, the index for diesel fuel was up 10.4% in January, a leading factor in the final demand goods increase.
I should also note that, just as the CPI showed higher egg prices, we also saw this reflected in today’s PPI. Eggs for fresh use were up 44% for the month and up a whopping 186.4% from a year ago.
I should also mention that the December numbers were revised, with the gain now at 0.5% compared to the 0.2% previously reported. And this complicates the inflation picture further as well.
Now that we’ve got the bad stuff out of the way, let’s talk about the bright spots.
When we back out food and energy, things start looking better. The cost of core wholesale goods, for example, was only up 0.1%.
Also, there are a number of components in this report that go into the Personal Consumption Expenditures (PCE) index, the Fed’s favorite inflation indicator. And those components were tame. That means when the PCE is updated later this month, it’s not going to be as hot as the CPI.
The fact is that PPI is the report that could be impacted by tariffs first. But remember, we have a very strong dollar, and much of the rest of the world is on very weak economic footing. So, everything we import is going to get cheaper and cheaper as the dollar remains strong against other weakening currencies. So, the strong dollar should offset a lot of concern about tariffs, but it will take some time for the market to realize this.
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The Game-Changing Shift
The bottom line is both of these reports go hand in hand with the Fed’s plan to keep interest rates where they are for now. It may be some time before they give any indication of where rate cuts stand. And these inflation reports are a clear message that we probably won’t see any until the second half of the year.
Given this, I believe there are more important things we need to keep our attention on right now.
The fact is something is brewing in the markets right now… a game-changing shift that is about to occur.
Right now, we are seeing some big changes happening in the AI sector. First, we had President Trump announce the $500 billion Stargate AI initiative. Then DeepSeek’s news broke and sent everyone into a frenzy, starting the global AI race.
All of this is happening as AI is starting to get cheaper and more powerful – by orders of magnitude. And soon, it will cross over into a whole new realm that could create millions more millionaires… and leave everyone else behind.
NVIDIA Corporation (NVDA) CEO Jensen Huang himself has gone on record to say that this next phase of AI is projected to be a $100 trillion opportunity.
That’s why I just released this special briefing to explain this crossover moment. I also share a free AI crossover recommendation as well as the details on seven AI crossover companies poised to lead the way.
Bottom line: AI’s next phase is positioned to be bigger than anything we’ve seen before. And I want to help get you as much information as possible so that you can profit from this crossover moment.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
