US Core CPI Picks Up on Services; Goods Inflation More Subdued

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2:00Sign up today at brilliant.org slash tutor and get 20 % off. That's brilliant.org slash tutor. Bloomberg Audio Studios. Podcasts, radio, news. This is Bloomberg Business Week Daily. Reporting from the magazine that helps global leaders stay ahead with insight on the people, companies, and trends shaping today's complex economy. plus global business, finance, and tech news as it happens. The Bloomberg Business Week Daily Podcast with Carol Masser and Tim Stenevek on Bloomberg Radio. Carol Masser along with David Gore. Tim is out on assignment. We'll be back tomorrow. So, hey, we want to talk a little bit about the inflation report because, David, as you mentioned at the top, I mean, it really did feel like investors like what we got, that there wasn't any kind of big surprise here.

2:53Yeah, just to give everyone an update on what we did learn, the core consumer price index, excluding that often volatile food and energy categories, increased by 0.3 % from June from the month before. That's according to the Bureau of Labor Statistics data that was released this morning, largely in line with what economists were forecasting, Carol, and on an annual basis, it picked up to 3.1%. That's one of those, whew, okay, not worse than could have been. All right, let's get more on the release, the outlook for U.S. inflation and really Fed policy. With us is Bloomberg TV and radio, international economics and policy correspondent, of course, our Michael McKee.

3:25He's here in studio. And also with us is Poojum Sreem. She is Vice President of U.S. Economics Research over at Barclays. She's joining us from New York City. Welcome, welcome to both of you. So, Mike, for those who maybe, I don't know, slept in on this Tuesday, what do we need to know about the inflation print this morning? Well, I think what you want to say is don't count your chickens before they're priced, because there is some evidence of tariff pass-through in these numbers, There's maybe some evidence that Chris Wall is right, that it's a one-time increase because we saw things that went up in price last month because of tariffs come down.

4:06So it may be a one-off, but it may be a continuing one-off that pushes inflation higher because you saw things like used cars go up half a percent. New car prices, which had been declining, are now flat, which the president claimed as a victory. But then you look at the profit margins for the automakers in the second quarter, and they were all minuscule or negative because they're absorbing it. And they're not going to continue to do that. So there is no proof that the tariff issue is over in these numbers. And the other aspect of it is... We haven't figured out all the details with some of our big trading partners.

4:48Services prices have gone up. They went up more than anticipated. So that's something that doesn't have to do with tariffs, but is a concern to economists. And it'll obviously be something that Fed wants to watch. Could you pick up on that, if you would? I was looking back at a recent note that you wrote before these numbers came out this morning. And you said that while firms intend to raise prices, they've been resorting to other mitigation measures first. What did these data this morning tell you about the way the economy has been reacting, is reacting to the president's trade policies? Yeah, sure.

5:19Great question. you know that the release this morning was to us a pretty mixed bag what was interesting is a lot of the acceleration that we saw in core cpi came from the core services component core goods prices were up inflation was you know on the core goods side still a 0.2 percent very similar to what we saw in june but really the increases in prices they're not as broad-based as one would have expected. Now, to be clear, we think it's too soon for us to conclude that the tariff pass-through is not happening or is more muted. We do think there are a couple of things that could have happened in July, which just made the core goods side of the report look a little softer.

6:03One is, you know, if you remember, July was a big promotion period. We did have an Amazon Prime Day event that lasted longer than usual. And we had similar promotions from retailers like Walmart and Target. So it's plausible that we just had slightly lower looking prices this July than we did last July. And if you look at some of the details within categories, that seems to corroborate with this narrative. But I also will allude to what Mike McKee pointed out earlier. We are seeing signs of early tariff pass through already in the economy. Within the CPI release itself, we've been flagging for a while that household furnishing prices, for example, are up 3 % just year to date.

6:50This is very different from how prices historically have behaved. Something very similar can be said about appliances in the U.S. So I just think tariff effects are in train. And while today's report may not suggest that we are seeing much tariff effects, I just think it's too soon for us to dismiss that effect altogether. Mike, let me ask you, if I could, about housing. We looked at these data for some indication of those costs as well. We have for many months now. What is it telling you about the state of the housing market in the U.S. today? Well, we're not seeing price declines, but certainly the price increases have leveled off.

7:27This is the third month in a row that owner's equivalent rent was up three-tenths of a percent. And on a year-over-year basis, we see slight declines here in home prices. We're seeing in the more immediate data, the case shillers and things like that, that home prices are not rising as fast because at this point, people have given up on selling, it appears. And so they're not raising prices because it's a seller's market. But let's see what happens going forward. The interesting question is going to be, how does the housing market recover? is a Fed rate cut or two going to be enough? How much does it have to go down before people get out there and start buying again?

8:11One thing I wanted to ask both of you, and Mike, let me start with you first, is that I think I heard it on surveillance this morning, the idea or the concept of it's not just the number and where it goes to, but the percentage of the increase or decrease. So when we think about that, I mean, I know the numbers came in line, but what we've seen in terms of trends in inflation, are we seeing it continue to kind of move down in a significant way? Like that percentage change? If you have a Bloomberg, go ahead and put in CPI, YOY, index, GP, and graph it. And in the last two and a half, three months, the inflation arrow has changed from going down and to the right to going up and to the right.

8:58It's not been a huge change yet. And we don't know for sure that that's going to happen or if it's just going to come continue to steadily rise. But it definitely shows the inflation trajectory has changed. All right. So let's cut to the chase. What does this mean for the Fed? Pooja, weigh in on this. I know Mike tends to say, and he's always right about this, that like, there's a lot more data coming our way before the next Fed meeting. So has this changed anything for Jay Powell and company? Well, I think not. The Barclays baseline for a while now has been one rate cut and all the way at the end of the year in December.

9:36Now, we're looking quite out of consensus, admittedly, but we think, you know, there is a lot of data to come. Nothing in this inflation print to us was, you know, was suggestive of inflation being more muted or the tariff effects are not coming. So we do think that, you know, the next employment report is going to be the big one to watch out for. Also, we're going to hear from Chair Powell at Jackson Hole. And so we think those would be good signals to watch for. But right now we maintain our call. The Fed is in no rush to cut rates. And we have a call for December. I believe Mike's getting his cowboy boots ready.

10:17You mentioned Jackson Hole and Mike lights up. You can't see it on the radio. We're getting ready. But Mike, how are you sort of thinking about the way this influences Fed decision making going forward? The report today, and of course, sort of what this might tell us about the PCE report coming up a little bit later. Well, I think it puts them in the category of if we get the same numbers that we've gotten. And by that, I mean inflation numbers and another round of bad jobs numbers. The Fed might be more inclined to cut. But when you parse who the voters are and what they've said since the last Fed meeting, you've got about two people who think they should go down, two people who think they should not, and two people who are undecided.

10:57The rest have yet to weigh in. So we will hear more over the next couple of weeks, including from the chair. and we'll see where they are going into September. But again, there's another jobs report and another CPI report and a PCE inflation report. And so there's a lot of information to come that will help decide what's going to happen. The odds are now 96 % that they cut in September, but I wouldn't put money into that market right now. I feel like I've seen this movie before, expectations that change very quickly on a data point. Michael McKee, thank you so much. Always appreciate it. And of course, Pooja Sreem, Vice President of U.S.

11:34Economics Research at Barclays. Hey, coming up later next week, do join us for our live coverage from Jackson Hole. We'll be on the ground in Wyoming. Well, we meaning Mike and team covering the Kansas City Fed's annual economic policy symposium and highly anticipated remarks from Fed Chair Jay Powell. All happens and starts Wednesday, August 20th and finishes up with a special edition of Bloomberg Surveillance. Tom Keene, Lisa Bromowitz, and the one and only Mike McKee will all be part of that special starting at 9 a.m. Eastern on Friday. What if data didn't sit still? What if intelligence moved with us?

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15:01China very much in focus here in the U.S., of course, as we wait to see sort of what happens with those trade talks, but also playing an incredibly important role around the world. We saw the Brazilian President Lula da Silva speaking with the Chinese leader, exchanging their views on international affairs. President Xi calling for coordinated efforts against unilateralism and protectionism. News today also that India and China set to resume direct flight connections as soon as next month. And we're seeing oil playing a critical role here as the contours of this trade war continue to come into focus.

15:32It does feel like, in a way, many parts of the world are moving on and increasingly away from the U.S. Let's get to a roundtable now to understand China's goals here, what they're thinking in terms of the role they're playing in the world. U.S. very clear, of course, about wanting a higher tariff world for those looking to sell into the U.S. Shadad Kazi joins us, Chief Operating Officer, Managing Director at the China Beige Book, here with us in the studio. And from our bureau in Buenos Aires, Amanda Suniga with us, Geo-economic Analyst for Latin America at Bloomberg Economics. And Shadad, let me start with you and maybe just give us your sense of how China is thinking about all this.

16:07We've had a series of three meetings now, Geneva, London, Stockholm. The pause continues here as we get perilously close, I think, to the Christmas holiday when people are going to be buying a lot of gifts and are going to be very worried if a lot of these tariffs come to pass. How is China thinking about the kind of trajectory of these negotiations with the U.S.? You know, when the year began, we would have thought that their primary objective was to bring the tariff levels down and negotiate just about trade. But what we've learned is that they are much more concerned about U.S. export controls because that is ultimately what hurts them far more than even tariffs do because they have ways to get around the tariffs.

16:45And so what they've done is they've used their chokehold on rare earth's minerals and magnets and forced, compelled really, the administration to relent and roll back U.S. export controls while also bringing down the tariffs. So two wins for Xi Jinping in the last several months. But what kind of relationship do you think he wants with the United States going forward? Well, he'd love nothing more than to be able to sell as much as possible and be able to import the things they care about most, the most advanced technology, not just ships, but across the board, right? That's in an ideal world. Now, that's probably not what he's getting right away, but he's getting pretty close to it.

17:24I don't think he feels a pressure to do anything more. I don't think he feels the pressure today to say, I'm going to pledge like Japan and Europe did, you know,$500 billion worth of investment. Or I'm going to pledge to buy all this U.S. agricultural output the way I did in the past. I think they've demonstrated, Xi specifically, we've got a lot of leverage and we don't need to play ball if you don't feel like it. I do think it's interesting that they want all the high tech. And yet Beijing is urging what local companies to avoid using NVIDIA's H20 processors, particularly for government related purposes.

17:54purposes. So yes, but there's always caveats. Ximena, come on in on this, because in the meantime, Latin America is watching very closely, I'm sure, and remind us of the relationship that already exists with China across Latin America and maybe what they hope to even solidify even further. Thank you, Carol. Yes, you know, Xi and Lula just talked and they said the relationship is as strong as ever. But so far, the support from China to Brazil seems to have been largely rhetorical, right? They have said, they have shared views on multilateralism and unilateralism on behalf of the U.S., condemning that, and China has been very keen on jumping on this collective criticism of the U.S.

18:49But even though Trump's tariffs may be giving BRICS, the bloc that Brazil and China have, along with India, Russia, and other smaller partners, even though Trump's tariffs seem to be giving it some mortar, it's still far from operating as a bloc, and it's not really coordinating a response, a collective response to the Trump tariffs. Jimena, on that note, do you anticipate that's likely to happen? I remember that moment a few months ago when there was a meeting of the BRICS countries. There was this tacit threat that they were going to work more closely together in opposition to what the United States was doing.

19:25President Trump clearly irritated, agitated by that, threatened even more punitive sanctions, more tariffs on those BRICS countries as a result of that. What would the catalyst be that would get them to do more than, as you say, just talk about presenting a more united front against the United States? I think there are two main issues that are blocking a more integrated response, a more coordinated response. One is the very diverse membership of the group in general, and also with respect to the Trump tariffs, they are facing slightly different issues, although they are becoming increasingly closer in the sense that, for example, now Brazil and India are similarly targeted.

20:05But for example, Russia has so far not been targeted with tariffs, although they have other issues with the U.S., of course. But the key thing is that China doesn't really need the bloc as much as the other members of the bloc need China or would benefit from a coordinated response with China. As Shazan just said, China has a lot of leverage, has demonstrated, has a lot of leverage to push back without offering any dramatic concessions, as other countries have done and the U.S. has backed down. So China does not really need to have the collective weight and heft of the BRICS block to stand up to Trump.

20:45If it did, however, it could really expand its geopolitical cloud and it would mean the BRICS would function more as a block. But so far, I think China is very focused on its national interest. And as long as it can stand up to Trump on its own, and it has the leverage to do it, it is unlikely to compromise its national interest to expand the BRICS heft. We're talking with Ximena Suniga, Geo Economic Analyst for Latin America, out there in our Buenos Aires Bureau, and also with us, Shahzad Qazi, Chief Operating Officer, Managing Director of the China Beige Book in studio. All right, so let's shift a little bit to China and India, which I think is kind of interesting.

21:26And, you know, just a little headline, as David mentioned, that it looks like India and China set to resume direct flight connections as soon as next month, according to those familiar, as they look to kind of reset their political ties as the U.S. and India, after years and years of working on improving that relationship, seem to have taken some steps back. China and India, what's China's goal there? Well, I think, you know, they have an incredibly complex relationship because whereas they trade a lot. It's not a friendly one. It is absolutely not. They have very serious national security concerns about each other, more specifically India with regards to China.

21:59And of course, they're constantly having these battles, rather, and skirmishes at the border. Long-running problems there. So, you know, I think the trade relationship... So is any of this real, or is it just for show? I think it's real to the extent that they want to do business with each other, but it's not, it doesn't go towards, you know, anything beyond that. I mean, India, so let's be clear, India does not want to be seen as a country that's going to counterbalance China and all the rest on behalf of the U.S. It wants to be seen as a power in its own merit, on its own right. And by that token, though, still, they also don't want to blow up their business relationship with China.

22:31This is far more complex than I think traditional models of geopolitics would suggest. You know, we were talking about sort of the gap that might be left if the trading relationship is ruined between the United States and China. How confident is China that it could get, yes, the rare earths, the critical minerals exported to other countries if the U.S. isn't able to buy them? I guess what I'm saying is, how sure are they in their ability to pivot to other markets if the U.S. is no longer what it has been? So they demonstrated, I think, that everybody is desperate for Chinese rare earths. And if you remember, what they did was briefly, they set export controls on more or less everyone so that they could prevent us from transshipping those rare earths right into the U.S., the way, you know, obviously China takes advantage of transshipment.

23:14So I think, I don't know if that's really the big concern, because there's such desperation, given the chokehold that they have as the sole supplier, really, of most of these things, including some really critical things like Samarium, which you need for weapons development and how dependent we are on that. And by the way, they are not letting that out. Himana, I also wonder, you know, if some great deal happens between the U.S. and China after, you know, if the delays are done, you know, will Latin America as a whole or specific countries be like, OK, missed opportunity, you know, we're out because we understand the importance of that U.S.-China relationship.

23:48And especially if they if China gets better terms in terms of tariffs, finally. what do you mean we are out sorry well meaning that they won't necessarily have such an open door perhaps or the conversation lines you know between china and latin america might go away if ultimately the u.s trade deal and tariff deal that they come together with china is not as onerous as maybe has been put out before that ultimately u.s and china come to terms that are good for both sides so does then china kind of back off again from latin america yeah in a way i think china is very present in latin america if you think of it outside mexico who exports 80 of its goods towards the u.s china is the main market for most of the other bigger biggest economies including brazil argentina chile peru and so i don't think that latin america can choose between the U.S.

24:50and China. For Latin America, the best would be not to have to choose. And for a while, it cultivated positive, pragmatic relationships with both markets that are important, not only in terms of trade, but also in terms of financing and in terms of tourism. Both markets are critical to the region in different respects, depending on the country. If having to choose, a lot of countries would try to push back a lot not to have to choose. They would continue to trade with China. They would continue to have financial ties. And they would try to push back on this on the U.S. Because China is now almost as important or more important for many of these countries as the U.S.

25:38is. Any last thoughts? Just real quickly. Well, look, China's going to be a big player, which is why I think when Secretary Rubio took over, his big focus initially was supposed to be to push back on China right here in the Western Hemisphere. That feels like years ago at this point. But it's an important objective, I think. All right. So appreciate both of you. Shehzad Qazi, Chief Operating Officer, Managing Director at China Beige Book, right here in studio. And then out there at our Buenos Aires Bureau for Bloomberg News, Jimena Suniga, Geo Economic Analyst for Latin America. Aging is real.

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