The economy was already slowing, and that was before higher tariffs kicked in last week, raising import taxes to the highest level since the Great Depression.
The latest jobs report showed only 73,000 jobs added in July, falling well short of expectations. But the bigger story lies in the massive downward revisions: May and June job gains were revised down by a combined 258,000. That drags the three-month average to just 35,000 jobs/month – the weakest pace since the onset of the pandemic in 2020. Consumer purchasing power is also shrinking – first because labor demand is falling but also because tariffs are pushing prices higher.
This week’s CPI report will likely confirm this slow but steady upward pressure on prices. This also means the easing of financial conditions we saw in the first 10 days of August could reverse somewhat, with Treasury yields moving back up.
Key Data Releases This Week
Consumer Price Index for July: This is the marquee release that could reshape Fed policy expectations. CPI increased 0.3% in June and is up 2.7% year-over-year. Economists expect the CPI to rise 0.2% in July on a monthly basis and 2.8% year-over-year. Core CPI, which excludes more volatile food and fuel prices, is expected to come in at 0.3% on a monthly basis and 3% year over year. The acceleration is likely driven by tariff effects hitting goods prices.
Thankfully, a slow but steady deceleration in housing costs is helping to offset some of the pressure on core prices. Zillow forecasts the rent components of CPI will continue to moderate, driven by a sharp deceleration in on-market rents over the last few months.
Producer Price Index for July: Producer prices will provide critical upstream inflation signals. Last month, PPI for final demand was unchanged from the previous month. However, goods prices advanced 0.3% while services fell 0.1%. Expect both goods and services to show an uptick this month – a worrying sign for a Fed that is increasingly concerned about an ailing labor market.
Retail Sales for July: Retail sales should also reflect the combination of dwindling job prospects and higher prices. This report could show the first clear signs of demand destruction. Add to those headwinds the fact that more and more households are increasingly crushed by soaring student debt, auto loans, and credit card debt according to the NY Fed Quarterly Household Debt and Credit Report.
Market and Policy Implications
The Fed held rates steady so far this year due primarily to tariff uncertainty, above-target inflation, and economic activity continuing to show modest expansion. However, the economy is now showing major cracks.
Inflation Expectations: A Mixed Picture: While consumer sentiment surveys show elevated near-term inflation expectations – with the median expectation jumping from 5.0% in March to 6.7% in April according to the University of Michigan – market-based measures of inflation expectations remain well anchored. Break-even inflation rates from 5-year and 10-year TIPS have not risen significantly, indicating investors aren’t pricing in sustained higher inflation despite tariff concerns.
Bottom Line
The CPI report on Tuesday will be the key catalyst, with any reading above consensus likely to send Treasury yields higher and stock markets lower as investors recalibrate expectations for both Fed policy and corporate earnings in a lower-growth but higher-cost environment.
JPMorgan now expects four Fed rate cuts starting in September. The bank sees a 25 basis point cut in September followed by three additional cuts in subsequent meetings, suggesting the Fed could prioritize supporting a weakening labor market despite elevated near term inflation pressures.
