Jobs now matter more than inflation — even as tariff pressures build

Adam

Summary:

Tariffs are lifting prices on food, cars, and goods, but jobs now drive Fed policy. Rising jobless claims and weak payrolls push rate-cut bets, while markets hit highs despite shaky fundamentals.

President Trump’s tariffs are no longer just a policy debate in Washington — they’re starting to show up in your grocery bill, your back-to-school shopping cart, and even the parts and prices of the cars you drive.

August’s CPI report revealed sticky prices in tariff-sensitive categories like vehicles, household goods, and food, making it harder for policymakers to ignore the trade overhang.

“When I see apparel prices jump by half a percent, those are tariffs,” RSM chief economist Joe Brusuelas told Yahoo Finance in reaction to the data. “When I see food prices jump, given the composition of the North American food supply chain, that’s tariffs.”

To that point, food prices climbed 0.5% last month, with the “food at home” index — your grocery store bill — rising 0.6%, the biggest monthly uptick since August 2022. Coffee, beef, rice, and fresh produce all saw notable spikes.

And it wasn’t just the grocery aisle. Motor vehicle parts rose 0.6%, new vehicle prices were up 0.3%, and furniture and bedding also climbed 0.3%, leaving them nearly 5% higher than a year ago. Even tools, hardware, outdoor equipment, and supplies — part of the manufacturing-heavy categories hit hardest by tariffs — jumped 0.8% in August.

But tariffs weren’t the only problem. Sticky services inflation is still alive and well. Airline fares surged 5.9% in August, adding to July’s 4% jump. Shelter costs, too, came in hotter than hoped.

“That’s not really where you want to be just before you’re going to start a rate-cutting cycle,” Brusuelas said.

But despite that warning, the Fed is preparing to cut interest rates next week. Jerome Powell has signaled it. Markets are pricing it in. And the reason isn’t inflation. It’s jobs.

Weekly jobless claims just hit 263,000, the highest level in nearly four years. Preliminary estimates from the Bureau of Labor Statistics show almost a million fewer jobs were added in the 12 months through March 2025. And the slowdown is still underway: Payrolls grew by just 22,000 in August, averaging a meager 29,000 over the past three months.

Suddenly, the "solid" economy that Fed officials were touting just months ago doesn't look so solid anymore.

For Powell & Co., this creates a tricky balancing act. Move too soon (or too much), and policymakers risk fueling inflation just as tariffs push prices higher. Act too slowly (or not enough), and cracks in the labor market could deepen, tipping the economy closer to recession — the dreaded stagflation mix.

It’s a delicate dance and history shows the Fed doesn’t always get the timing right, as President Trump frequently likes to remind our Fed chair.

Investors are split on how to read it — if you ask them. Retail sentiment looks downright gloomy. Just 28% of investors called themselves bullish in the latest AAII survey, while nearly 50% are bearish, the most pessimistic reading since the April tariff lows.

On the other hand, if you don't ask them but watch them, investors have handed the market yet another series of record highs.

Citi’s Levkovich Index, which crunches hard data like margin debt and options activity, is still flashing “euphoria” at 0.46. That’s down from the peaks seen earlier this summer but still well above the 0.38 threshold that signals euphoria, or an overstretched position. Historically, these are levels that have preceded weaker returns.

In other words, Main Street could be bracing for more pain, while Wall Street’s positioning still looks stretched. Just this week, Wells Fargo, Barclays, Deutsche Bank, and Yardeni Research all raised their S&P 500 targets, citing resilient earnings and a still-surging AI investment cycle.

Deutsche Bank now sees the index hitting 7,000 in 2025, Wells Fargo set a year-end target of 6,650, Barclays raised its 2025 outlook to 6,450, and Yardeni lifted its year-end forecast to 6,800, even assigning a 25% chance of a “melt-up” to 7,000. As of Thursday’s close, the index was trading just shy of 6,600.

But that optimism comes with a warning: Easier Fed policy could supercharge investor FOMO just as labor cracks and sticky prices suggest shakier fundamentals.

Still, the bull case is clear: As long as AI investment is flowing, the rally lives on. Or, as Barclays strategist Venu Krishna put it, “Macro is under pressure. But we take the glass half full view.”

And if the glass cracks? The rally might too — no matter how fast the Fed tries to patch the leak.

Source: finance.yahoo

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