INDICATOR: July Producer Prices

KEY DATA: PPI: +0.2%; Ex-Food and Energy: -0.1%; Goods: +0.4%; Energy: +2.3%;

IN A NUTSHELL: “With wholesale costs remaining well contained, there is little prospect that consumer inflation will accelerate significantly anytime soon.”

WHAT IT MEANS: The Fed would love to see inflation pick up steam but it doesn’t look like that will be happening in the near future. The Producer Price Index edged up in July, largely due to a jump in energy costs. With the trade war with China heating up, that gain has already been pretty much wiped out. The other volatile component, food, was flat. The trade war is strangling the farm sector so don’t expect a surge in prices there. Indeed, looking down the list of components, there were few places where prices rose at a strong pace. As for the pipeline, it is largely empty, with intermediate and crude prices outside of energy doing nothing.

MARKETS AND FED POLICY IMPLICATIONS: Right now, the economic data are playing second fiddle to presidential tweets. It’s all about the trade war. And that is a real problem for the Fed. Chair Powell indicated the deterioration of global growth was a (or the) major factor in cutting rates. But by reducing rates, the Fed has enabled further trade bullets to be fired. If the administration expects the Fed will cut rates to offset the negative impacts of its trade policies, it will continue with those policies. The Fed has blundered, even if it was trying to do the right thing. By linking trade and interest rate cuts, it may have precipitated a vicious cycle of more trade battles, slower world growth, faltering equity markets, additional rate cuts – and so on. Where this not so merry-go-‘round stops is anyone’s guess. There are two immovable objects, Trump and the Chinese. Neither is willing to lose face by giving in. Unfortunately, unless the U.S. and/or China back down, the cycle of trade and currency battles will continue and likely worsen. And the end to that is almost certainly a recession.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.