Weather 
Once again Wall Street was surprised by a deflationary wholesale price report where the level of the so-called producer price index actually dropped by three-tenths of a percent. And it’s worth noting that after rising 1.1 percent in April, the PPI eased to 0.6 percent in May. And then the outright decline of three-tenths in June.
This follows yesterday’s deflationary CPI report. Both are a welcome relief from the inflationary reports of recent months. Real average hourly earnings rose 0.8 percent in June. That’s the best monthly real wage gain in 11 years, excluding the pandemic. Wall Street is also wrong about its prediction that the Fed will be raising rates, as these deflationary reports have taken rate hikes off the board, undoubtedly for the rest of the year I think.
Actually, my view is the Fed’s not going to change their target rates until Chairman Kevin Warsh’s various task forces report. There are five panels with some very smart people on them. They’re gonna look at the appropriate inflation measures, the Fed’s balance sheet, communication and forward guidance, economic data quality, and productivity.
This is part of Mr. Warsh’s regime change. And it’s a very good idea. Yet my hunch is not to expect any big policy changes until those task forces publish their work, and the central bank figures out how to absorb the reports and then change them.
Meanwhile, even as President Trump steps up the bombing of Iran in response to the IRGC busting the ceasefire and the memorandum of understanding, inflationary expectations in our financial markets are actually coming down.
Indeed even the WTI oil price seems to have stopped rising. I think word money markets want to see regime change in Iran even more than regime change at the Fed. For the record, the two-year CPI break-evens have dropped all the way to 1.89 percent, that’s below the Fed’s 2 percent target, the dollar is strong, and precious metals are soft.
Meanwhile profits, productivity, and stock prices are all soaring. After the pro-growth incentives of the One, Big, Beautiful Bill of a year ago. So at least for now, we’ve got falling prices and a rising economy. Has Goldilocks returned?
