Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / The Canadian Trade War and US Stagflation
Transcript
- Lucas: Look, if you want to know why your grocery bill isn't moving down as fast as you'd hoped, stop looking at oil futures and start looking at the border with Canada. The trade war just went from theoretical posturing to actual import bans, and that is a classic stagflationary trigger. Luna: Right, because when you cut off a major supplier of energy and raw materials, you aren't just hurting their export numbers; you're immediately raising input costs for half the American industrial base. Lucas: Exactly. And we are seeing it play out in real time with the latest data. The July CPI came in at three hundred thirty-two point eight, which sounds modest until you remember that core CPI, excluding food and energy, is sitting at three hundred thirty-six point eight. That core number is sticky, and now we have new tariffs layering on top of existing supply chain fragility. Luna: It feels like the Fed is walking a tightrope here. If they cut rates to help growth, they might ignite that core inflation further. But if they hold steady, the tariff shock could tip us into a deeper slowdown. Lucas: That is the dilemma. Let's look at the labor market for a second. Unemployment is flat at four point one percent, but nonfarm payrolls only added about one hundred fifty-nine thousand last month. Job openings are actually up slightly to seven thousand two hundred seventy-one thousand. So we have a weird disconnect where jobs are available, but wage growth is slowing down to match the broader economic chill. Luna: Yeah, and average hourly earnings ticked up to thirty-seven dollars and eighty cents. It's not a crash, but it's not the runaway wage spiral the Fed fears either. It's just... stagnant momentum. Lucas: Stagnant momentum is the definition of stagflation. You get the low growth without the deflation. And now, with Canada retaliating with twenty-seven point six billion dollars worth of tariffs, we're looking at a bilateral squeeze. This isn't just about political scorekeeping; it's about logistics. Trucks stop crossing, parts sit in yards, and those storage costs eventually get passed to the consumer. Luna: I wonder if small businesses are feeling this more acutely than the big retailers who can absorb the hit or source elsewhere. It probably depends heavily on how integrated their supply chains are with Ontario and Quebec. Lucas: Absolutely. Small manufacturers rely on just-in-time delivery from neighboring provinces. When that breaks, you don't just lose revenue; you lose efficiency. And inefficiency is expensive. That inefficiency shows up in the PCE price index, which rose to one hundred thirty-one point seven in July. It's broad-based, not just a few outlier items. Luna: So the question becomes: is the market pricing this in? Because the S&P five hundred is barely down, and gold is hovering around four thousand four hundred dollars an ounce. Lucas: Gold is up, which suggests some smart money is hedging against currency debasement or real rate uncertainty. But equities are still trying to price in soft landings. I think the market is underestimating the lag effect of tariffs. It takes months for a ban on Canadian lumber or aluminum to fully ripple through construction and auto manufacturing costs. Luna: It's also worth noting that China's imports missed estimates in August. If global trade is contracting overall, the U.S. can't just shift all its demand elsewhere without driving up prices globally too. Lucas: Right. You can't solve a North American supply problem by buying from Asia if Asian shipping lanes are congested and costs are rising. We're seeing the world economy fragmenting into blocks, and each block is becoming less efficient than the last. That inefficiency is inflationary. Luna: And with the ten-year breakeven inflation rate sitting at two point three seven percent, the bond market isn't exactly screaming panic yet. But they aren't celebrating either. Lucas: Two point three seven is dangerously close to the Fed's two percent target for comfort. If tariffs push that even higher, the Fed loses its ability to maneuver. They can't cut rates aggressively without letting inflation expectations unanchor. Luna: It reminds me of the early seventies. Not the exact same causes, but the same dynamic: external shocks meeting a stubborn domestic economy. The Fed then kept rates too low for too long. Lucas: They did. And now, with nominal GDP growing at only one point five percent annualized in the first quarter, we don't have much room for error. Real GDP is essentially flatlining relative to population growth. We're not expanding the pie; we're just fighting over smaller slices while the oven heats up. Luna: So what does this mean for the average listener watching their savings account? Are they better off locking in fixed rates or riding out the volatility? Lucas: If you have debt, fix it now. Interest rates are likely to stay higher for longer because the Fed can't afford to print money to subsidize a trade war. Cash is still king for liquidity, but don't expect high yields to last forever if the economy slows enough to force a hand. Luna: Practical advice. Keep your options open. Because right now, the map is changing faster than most people realize. Lucas: Speaking of keeping things open, if walking through the economy with us has made something click for you, a couple of dollars a month is genuinely what keeps these going. You can support the show directly at buy me a coffee dot com slash fexingo. It helps us keep digging into the data so you don't have to guess. Luna: Yeah, it really makes a difference in keeping the research ad-free and deep. Thanks for supporting the work. Lucas: Back to the trade data. One thing that often gets missed in these tariff wars is the secondary effect on the dollar. When the U.S. imposes unilateral bans, it can sometimes weaken confidence in the dollar as a neutral reserve currency. Luna: That's an interesting angle. If other countries start looking for alternatives because they feel targeted, that could actually strengthen the euro or the yen in the short term, even amid their own problems. Lucas: Exactly. And look at Japan. Their foreign reserves dropped by a record eighty billion dollars in August due to yen intervention. They're spending massive amounts of capital to prop up their currency. That's a sign of stress in the global financial system. When everyone is spending reserves to manage exchange rates, there's less liquidity floating around for productive investment. Luna: So we have a trade war dragging on costs, Japan burning reserves to stabilize, and China slowing down demand. It's a perfect storm for low growth and sticky prices. Lucas: Precisely. And the Federal Reserve is stuck in the middle. They released reports suggesting their next rate call could come down to a few hundredths of a percentage point. That precision implies they are terrified of making a mistake. Every move is weighed against this new trade reality. Luna: It's almost paralyzing. To act is to risk inflation. Not to act is to risk recession. There's no clean path here. Lucas: There rarely is during structural shifts. But here's the concrete takeaway for listeners: watch the import prices. If wholesale import prices start jumping in the next CPI report, that's the signal that the tariff pain is hitting the factory gate. Until then, it's mostly noise and forward guidance. Luna: So, patience and vigilance. Watch the data, don't react to the headlines. Because headlines scream, but the data whispers the real trend. Lucas: Right. The data whispers, but it usually shouts later. And when it does shout, it'll be about how long it took for these trade barriers to finally break consumer sentiment. Luna: Let's hope it doesn't take another full quarter to find out. For now, we just keep tracking the numbers. Lucas: Agreed. We'll see you next time with more on how the global economy is reshaping itself beneath our feet.