By Randall W. Forsyth

Regardless of perceptions about its veracity as an inflation measure, the July consumer price index will likely prove to be the key event for the week for the interest-rate, currency, and equity markets.

Indeed, Tuesday's CPI release will mark a "moment of truth on tariffs," according to Piper Sandler economist Jake Oubina. Core goods prices are expected to show an uptick reflecting import fees, which should result in an 0.3% rise in overall core CPI (which excludes those extraneous food and energy costs) and a 0.2% rise in the headline number.

On the latter score, Deutsche Bank economists estimate the overall CPI will be held down by a 2.4% seasonally adjusted decline in gas prices for the month. That's even though AAA found virtually no change for the nationwide price at the pump over the past month, with regular fuel staying within a penny of $3.15 a gallon. If Mark Twain came back to observe this, he might well opine on lies, damned lies, and seasonally adjusted statistics.

Even with this fudge factor, the bank's economists figure the expected July monthly increases would lift the year-over-year rise to 2.8% for the headline CPI and 3.0% for the core measure, increases of 0.1 percentage point for both. At Federal Reserve Chair Jerome Powell's July 30 press conference following the central bank's recent policy meeting, he emphasized those year-over-year changes to avoid any single month's impact.

But those 12-month trends are moving in the wrong direction from the Fed's 2% inflation target. Prices are rising closer to a 3% annual pace, while the economy's growth trend is slowing (even apart from the first half's tariff-induced perturbations) to below 2%. That may be something like stagflation lite (certainly less satisfying than a heartier brew of an economy growing faster than prices).

Moreover, RBC Capital Markets economists Mike Reid and Carrie Freestone wrote in a client note that "we do not anticipate next week's [CPI] data will fully capture the impact of tariffs on consumer prices," no surprise as a new series of levies took effect this past Thursday. Upward pressure from previous tariffs should emerge first in the producer price index, due Thursday, which they see rising 0.4% for the headline number and 0.5% for the core reading.

Higher-than-forecast increases could lessen the Fed's leeway to cut its federal-funds target at next month's policy meeting, they add. The CME FedWatch site put an 89.4% probability on a quarter-point reduction from the current range of 4.25% to 4.50% as of Friday, virtually unchanged from a week earlier following the weak July employment data.

An above-consensus CPI report could also spark a selloff in Treasuries, according to James Reilly, senior market economist at Capital Economics. That market struggled this past week following a series of weak auctions, which were "a reminder that huge public debt to GDP ratios are not going anywhere fast," he wrote in a client note.

That was no deterrent to the stock market's continued advance, however, with the Nasdaq Composite adding 3.87% to end the week at a record while the S&P 500 added 2.43% for the week and ended Friday within a hair of its record touched Monday. The Dow Jones Industrial Average tacked on 1.35% but was still off 1.86% from its peak reached last December.

Beyond those headline averages, the bubbly aspects of the market were hard to avoid. Initial public offerings are heating up, while valuations among technology darlings were off the charts, with Palantir Technologies trading at 100 times revenue (hat tip to Doug Kass of Seabreeze Partners).

It's a "Twice in a Lifetime" experience to Evercore ISI's strategy team led by Julian Emanuel, who was channeling Talking Heads while recalling the dot-com bubble at the end of the last century. What's forgotten is that there were then four drawdowns of 10% or more before the final 117% surge from August 1999 to the March 2000 peak. A pullback of 7% to 15% is their call going into October, not atypical for that time of year.

So they advise hedging some of the outperformance of artificial-intelligence stocks by buying put options on the Invesco QQQ exchange-traded fund or replacing stockholdings in winners such Nvidia or Amazon.com with call options, which provide limited loss potential while maintaining upside.

In other words, Emanuel et al. see a late summer meltup before a fall swoon. Same as it ever was, same as it ever was.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

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August 08, 2025 19:24 ET (23:24 GMT)

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