Brace for Another Inflation Wave

By Larry Benedict, editor, Trading With Larry Benedict

President Trump is teeing up a fresh round of tariffs.

New or increased rates are slated to go into effect on August 1. Those new rates include a 35% tariff on Canada and 30% on imports from the European Union and Mexico.

All told, over 20 other trading partners will face tariff rates ranging from 20% to 40%.

That could increase the already elevated effective tariff rate. It currently stands at 20.6%, the highest rate since 1910.

And remember, that’s before the new round of tariffs that could go into effect starting next month.

This is coming at a time when existing tariffs are starting to show up in inflation data… and the market is signaling it could get worse still.

New Inflation Wave

The U.S. is finally coming off the post-pandemic inflation wave.

Massive government stimulus and snarled global supply chains sent consumer inflation to its highest level since the early 1980s.

The Consumer Price Index (CPI) peaked at 9% back in mid-2022. Since then, the yearly rate of change has been moderating.

That means CPI is still increasing, but at a smaller rate.

There are growing signs that the tariffs are starting to bite, and CPI could be on the rise again. Here’s the yearly change in CPI going back five years, including the June report that just came out this week…

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The CPI rose by 2.7% in June compared to last year – up from 2.4% last month.

And there’s evidence that tariffs are impacting the data. In the June report, core goods prices rose by 0.5% compared to the prior month. That was the most since CPI peaked at 9.0% in 2022.

Several CPI categories that should be sensitive to tariffs are showing price increases.

That includes a 1.8% monthly gain for both sports equipment and toys. Household furnishings prices rose 1%, the biggest increase since January 2022.

That means we’re now seeing evidence that tariffs are flowing through to consumers in the form of higher prices.

And it could be just the start. The market is warning that another wave of inflation is upon us.

The Market Is Signaling Inflation Fears

In recent weeks, I’ve shown you how to interpret price action on a chart and what it could mean for the economy.

That includes the price of copper, which is highly correlated with longer-term inflation expectations.

I wrote in this issue about the looming breakout in copper prices.

A domestic copper benchmark rose by 12% last week after Trump threatened 50% tariffs on copper imports. That breakout to record highs warns of rising inflation ahead.

Another chart that should concern you is the 30-year Treasury yield.

I showed you recently that the 30-year yield could stage a move higher from an ascending triangle pattern as investor concerns grow over U.S. debt and deficit spending. Here’s the updated chart below.

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The 30-year yield is near a key breakout level at 5%. And rising inflation could be a catalyst for a big jump in yields.

That’s because bondholders receive fixed coupon payments. When inflation picks up, that erodes the purchasing power of income collected from bonds. So investors demand higher yields to compensate for inflation.

The recent surge in copper and potential breakout in bond yields is a warning from the market that a tariff-driven inflation wave is lurking.

That means this week’s increase in CPI could just be the start. If this plays out the way it appears to be, we should expect more inflation in the months ahead.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict