Trump Tariffs Ignite Producer Prices

Stagflation Fears Intensify

Summary
US producer prices jumped 0.9% MoM in July 2025—far surpassing the 0.2% consensus—as the President’s tariffs ripple through supply chains. Annual PPI hit 3.3%, the highest since April’s tariff escalation. With importers rushing to beat deadlines, the Port of L.A. processed a record 1M+ TEUs last month. But this front-loading is unsustainable; we expect a reversal that could trigger consumer inflation and slowdown—a stagflation cocktail.

Tariff Scale: Depression-Era Levels
The average effective US tariff rate now stands at 18.6%, a high unseen since 1933. Key measures include:

· 25% on autos/parts (most countries)

· 50% on steel, aluminum, copper

· 145% on Chinese goods (temporarily holding at 45%)

· 10% universal baseline tariff
Impact: $1,254 average tax per US household in 2025, rising to $1,588 in 2026.

Sectors in the Crosshairs
1. Automotive (Most Exposed):

· Cumulative tariff costs: $11.7B (through June)

· Toyota: $3B Q1 profit hit

· GM: Only 45% domestic production share

· Avg. vehicle price could rise $6,000; RAM trucks may hit $100K.

2. Tech & Consumer Goods:

· Computers: +1.4% MoM (3 straight months); 17% short-term spike expected

· Clothing: 37% price risk from Asian tariffs

· Appliances: +1.9% MoM in June (highest since 2020)

Stagflation Watch: 1970s Redux?

I remember the 1970s like it was yesterday. I started my career in the securities industry on January 2, 1981. By then, I had an accomplished career in chartered accounting and management consulting. Today, I am uneasy with the warning signs:

· Goldman Sachs: Recession odds ↑ to 35%; core inflation to hit 3.5% amid 1% GDP growth

· Consumer sentiment is down more than 30% since Nov; 67% expect rising unemployment

· OECD: 2025 growth down to 1.6% (from 2.8%), inflation up to 3.9%

Key divergence from history: The Fed won’t tolerate 1970s-level stagflation (per Moody’s). But its dual mandate—taming inflation with higher rates vs. protecting jobs with lower rates —traps it in a policy box.

The Fed’s Dilemma: Three Paths

1. Wait-and-See (Current stance): 87% market odds of a 0.25% Sept cut; <2.5 cuts priced for 2025.

2. "Volcker Mode" (Crush inflation): Rate hikes despite recession risk.

3. Accommodate Growth: Cut rates to support labor—traders increasingly bet on this.

Why Consumer Prices Haven’t Spiked Yet

1. Margin Absorption: Firms eat costs temporarily (per Prof. Blecker).

2. Front-Loading: Record July imports have built inventory buffers.

3. Services Dominance: July’s core inflation driven by airlines (+4%) and healthcare, not tariff-hit goods.

Investor Playbook
Overweight:

· International utilities/healthcare (defensive)

· Value stocks (4% discount to fair value)

· Small-caps (16% discount)

Underweight:

· Tech/materials (57% foreign revenue exposure)

· Autos/industrials (supply chain vulnerability)

Currencies & Gold

· USD: Down 5.2% YTD. Conflicted drivers—tariffs (bullish) vs. reserve diversification (bearish).

· Gold: Up +26% YTD; record highs, presently $3,356/oz. Our view: Hold 10% in gold/miners. Catalysts:

o Stagflation hedge (low real rates + high inflation)

o International central bank demand (900T expected in 2025)

o Policy/debasement risk buffer

Outlook: Short-Term Pain, Structural Uncertainty

· Recession odds: 40-50% (Morningstar).

· Fed’s call between Volcker-style inflation fighting or growth support will define markets for years. The reason President Trump wants his nominee to head the Fed, a discussion requiring comments from the heads of America’s largest banks.

Bottom Line
Producer prices signal tariffs are beginning to bite; consumer impacts loom in 6-9 months as inventories thin. The Fed faces its toughest test since the 1970s, with no clean policy exits. Position for volatility: Favor defensives, value, gold, and select international equities. Bond investors may struggle amid conflicting Fed objectives. Duration of tariffs and trading partner retaliation remain wild cards—stay nimble.