Inside Markets — Transitory

Tariff-related price adjustments will result in higher observable inflation (CPI, PPI, PCE) over the next few months.  Notwithstanding any additional tariffs, these monthly inflation updates will likely peak in October (reported in November).  All else equal, passing tariff expense to consumers should reduce real disposable income, which would ultimately result in lower prices. Inflation is caused when money supply grows faster than an economy’s productive capacity.  US money supply growth peaked at 26.7% YoY in February ’21 with headline CPI peaking at 9.1% in June ’22.  Of course, the explosive growth in money supply (controlled by the Fed) was happening when supply chains (productive capacity) were impaired.  The Fed only began to reduce money supply growth after the signing of a $1.9T fiscal spending bill when US and global manufacturing PMI were at record highs.  With that series of policy mistakes in the rear-view mirror, money supply growth of +4.8% YoY and expanding US production capacity have 12-month forward inflation breakeven yields priced for 2.72% YoY headline CPI.