Iran may be losing the only leverage it has had in this conflict, but it is doing so incrementally. The Iranian position is eroding, not collapsing. Operation Economic Outcast is likely to eventually cause the Khamenei regime to crack and collapse, but, barring some unforeseen development, that could still be weeks if not months away. Meanwhile, the attritional nature of such economic warfare means the US is still grappling with the inflationary influences of high oil and fuel prices. If Iran manages to launch another strike at Saudi Arabia’s East-West Pipeline, or if the Houthis eventually succeed in imposing a more stringent blockade of the Bab al-Mandeb, oil prices and thus diesel prices could quite easily soar upward again.

With oil prices remaining quite high, but not trending sharply higher, the oilpocalypse is still looming just ahead. It’s just not clear who it’s for: the US or Iran.

Here in the United States, the summer had been a tantalizing mix of curiously optimistic inflation news and problematic job market news.

Now that summer has moved into fall, however, we have seen a decided and negative shift to both the news and the underlying economic data in particular.

Inflation is rising.

Job growth is slowing. A new jobs recession may be looming.

Nor is the grim economic outlook confined to the US. Europe is facing its own energy crises—inadequate natural gas stores with winter fast approaching as well as a growing shortage of diesel fuel—with scant prospects of either improving any time soon.

The oilpocalypse has arrived for everyone. The oilpocalypse is getting worse, and we still do not know how much worse it will get.

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Iran Still Contesting The Strait Of Hormuz

The war with Iran has faded from front page of most media outlets, but it is continuing, and the IRGC is still determined to prove it has control over the Strait of Hormuz.

That control has become indisputably more important for the IRGC, as last month saw multiple sources reporting that crude oil flows from the Persian Gulf were near prewar levels.

One consequence has been a surge in incident reports by the United Kingdom Maritime Trade Operations Center, making October the most eventful month of 2026 even before the month is halfway over.

Notably, the IRGC has once again expanded its theater of attack operations, with two of the most recent attacks on civilians shipping coming not in the Strait of Hormuz, but well inside the Persian Gulf off the coast of Al Jubayl, Saudi Arabia.

Reporting based on commercial data from Kpler and other agencies shows the consequence of the increase in IRGC activity to be an inevitable decrease in Persian Gulf oil flows.

Data from trade consultancy Kpler showed that average weekly flows through the Strait of Hormuz climbed as high as 15mn barrels a day in late September, almost 90 per cent of prewar levels.

But these have since fallen back to about 11mn b/d. Preliminary data showed just 4mn barrels transiting the strait on Tuesday.

Adding credibility to that reporting is the continued reduced oil production around the Persian Gulf.

Only Iraq and the UAE succeeded at bringing crude oil production to back to prewar levels and above. Saudi Arabia, Kuwait, and Iran are all producing substantially much less oil.

Oilpocalypse has always been the inevitable result of Persian Gulf oil not flowing. For now, at least, Persian Gulf oil is not flowing—certainly not at levels to which the world was long accustomed.

Ukraine And Russia Add To Global Diesel Distress

Oil dislocations in the Persian Gulf have certainly been the catalyst for the oilpocalypse, but they are not at all its sole cause.

The world was reminded of the “other” source of global energy supply shocks when President Trump announced last week on Truth Social that Ukraine and Russia would enact an “energy ceasefire”, halting attacks on each other’s energy infrastructure.

That came on the heels of a deal between Russia and the US whereby Russia agreed to release some 500,000 tons of diesel fuel into global markets, while the US agreed to lift sanctions on Russian diesel for those 500,000 tons.

Beyond the dislocations in the Persian Gulf, a large part of what drove both the deal with Russia to release diesel fuel into global markets and the energy ceasefire itself is the ongoing effectiveness of Ukraine’s drone campaign against Russia oil infrastructure, particularly oil refineries.

With 32 major refineries and roughly 6.5 million barrels per day (mb/d) of installed refining capacity, Russian has historically been the world’s third-largest producer of refined oil products, after the United States and China. However, a long-standing Ukrainian campaign of deep drone strikes on Russian refineries has intensified significantly over the past 18 months. In June, Russian refinery throughput fell to 3.8 mb/d, its lowest level in more than 20 years and roughly 30% below a year earlier. Reported gasoline output is down by 20% compared with 2025 levels, while diesel production is estimated to have fallen by nearly 30%, prompting the government to restrict fuel exports to protect domestic supplies.

Ukraine has targeted Russian oil infrastructure since 2022, when Russia’s full-scale invasion began. However, the growing range and impact of Ukrainian drone strikes in 2025 and 2026 point to a dramatic expansion of Ukraine’s technological and military capabilities. In the first eight months of 2026, a Russian refinery was hit on average once every three days.

Ukraine’s drone attacks have reduced Russia’s operational diesel refining capacity to the point where Russia earlier this year felt obliged to suspend most exports of diesel fuel, focusing diminishing production capacity towards the domestic market instead.

Ukraine’s continued success in targeting Russia’s refineries led to an expansion of the export ban at the end of September.

Ukraine’s strategy is self-evident. By targeting and disrupting Russia’s oil refineries, Ukraine deprives Russia of fuel it needs for the front lines in Eastern Ukraine. By disrupting Russian energy exports Ukraine deprives Russia of much needed hard currency to fund its war efforts.

The effectiveness of that strategy succeeded by July in pushing the second-largest exporter of diesel almost entirely off the global market.

Russia is the world’s second-largest diesel exporter after the U.S., and refinery outages there can significantly affect global supplies of fuels. Its exports were already slowing prior to the ban due to domestic shortages left by Ukrainian drone attacks.

Diesel and gasoil loadings from Russia were just 234,000 barrels per day from July 1 to 10, according to Kpler, down from 400,000 bpd in June and the 2025 average around 817,000 bpd.

Given that Persian Gulf diesel exports amounted to 1.4million bpd in 2025, the twin disruptions of the war with Iran and the war with Ukraine have disrupted over 2 million bpd in diesel exports.

With peace remaining elusive with Iran, President Trump has sought to ease some of the Russian diesel dislocation through the “energy ceasefire” between Russia and Ukraine. The clear conclusion here is that Trump is having better luck engaging in diplomacy with Russia than with Iran. The tacit admission is that diesel diplomacy with Russia is made necessary because Ukraine pushed Russian diesel out of global markets.

Ukraine’s strategy also makes it highly problematic whether Russia will be able to honor its export commitment to President Trump. The “energy ceasefire” scarcely got started before there was a Russian missile attack on Ukrainian energy infrastructure, and within days, Ukraine announced it was “done” with the ceasefire.

Zelenskyy said Ukraine had honored a proposed energy ceasefire for three days, refraining from both attacks and retaliation, while Russia subsequently launched a massive assault on Ukrainian energy infrastructure, including approximately 40 ballistic missiles.

Russia may have leave from the US to export 500,000 tons of diesel. It remains to be seen if Russia has the capacity to produce 500,000 tons of diesel for export. Ukraine is certainly doing what it can to ensure Russia does not have that capacity.

Putin’s war in Ukraine and the war with Iran have produced synchronous energy supply shocks, each amplifying the effects of each other and magnifying the global oilpocalypse.

Oil Prices Resume Rising, Diesel Never Really Stopped Rising

We can easily see the shape of the oilpocalypse in the form of benchmark crude and diesel prices.

Benchmark Brent and West Texas Intermediate had eased significantly in late July and early August, only to see prices push up once more heading into September.

Even more tellingly has been the widening spread between Brent Crude and West Texas Intermediate since late September. As crude prices began rising again after a brief stabilization interlude, Brent has risen faster than West Texas Intermediate.

The US is hardly the only oil supplier to the world, but it is rapidly becoming the most reliable oil supplier.

Far more disconcerting, however, has been the inexorable rise in diesel contracts.

US diesel prices had stabilized and even trended down starting in mid-September before reversing in October.

European diesel prices had not seen even that much stabilization. There was a much smaller decline starting in September, but events have since reversed that tiny bit of improvement..

Perversely, while the shortage of diesel in the global marketplace is the result of both the war with Iran and the war in Ukraine, part of the corporate media chattering class wants to dismiss the indisputable facts of Russia’s diesel export ban and prior diesel export volumes and make the ongoing diesel supply shock all about the war with Iran. The loss of 817,000 bpd of diesel from global markets doesn’t matter when it is Russian diesel, but the disruption of 1.4million bpd of diesel does matter because it is Persian Gulf diesel, or so the “experts” would have you believe.

One of Fox News’ resident “experts”, retired Lt. General Keith Kellogg, advanced exactly this thesis this past Friday:

If he thinks he can negotiate with these guys, I think he is dead wrong in the sense that the real problem with diesel prices is not Zelenskyy in Ukraine. It’s not with Russia in Ukraine. It’s all what’s happening in the Gulf. And if you look at the graphs that have come out of Kpler, you can see where the real problem is with not that having good transit through the Strait of Hormuz. Just recently they had a mine hit a ship and five of the nine major oil transport vessels, companies, have now said they’re not going to go into the Gulf.

Meanwhile, over the weekend Ukrainian drone attacks set fire to the Petersburg Oil Terminal in St. Petersburg, Russia, yet again.

The data shows the impacts of Ukraine’s strategy of targeting Russian refineries and export terminals. Russian revenue from sea-borne oil products exports plunged 32% month on month in August, before Putin tightened the global diesel export ban. The places where Russia is increasing diesel exports is to landlocked Central Asian countries such as Kazakhstan, Kyrgyzstan, Mongolia and Tajikistan. The rest of the global market is having to do without Russian diesel exports.

To pretend Ukraine’s strategy against Russia has no ramifications outside of Russia and Ukraine is simply delusional. Keith Kellogg proves once again that “expert” is wokespeak for “blithering idiot.” We only need to see what has happened to diesel and gasoil prices globally to recognize that any reduction in global diesel supply is a supply shock—and Ukraine has shocked global diesel markets beyond Central Asia by disrupting Russian refining and sea-borne export operations to the tune of over a million and a half tons of diesel.

Ukraine has absolutely contributed to the rise in EU diesel pump prices over the past year. On that point the data leaves little room for doubt or debate.

We saw the impacts of these diesel price rises when the Consumer Price Index Summary report came out last week. Not only had energy price inflation become significantly worse in the United States, the surge in durable goods prices coupled with rising service prices were some of the many indicators that energy prices were having an inflationary impact on other consumer goods—something that has been forecast, projected, and even expected, but which only began to appear last month.

The Producer Price Index Summary report was an even more cynical assessment. Among its many inflation signals was a surge in inflation for Stage 2 Intermediate Demand.

The rise in inflation within the US economy is being echoed across the Atlantic throughout the Eurozone, with year on year Eurozone inflation posting its second-largest monthly increase this year.

The war in Ukraine and the war with Iran have disrupted a large portion of global diesel supply on top of disrupting global oil supply. These twin disruptions have been pushing both oil and diesel prices up ever since the start of Operation Epic Fury. This past month we have seen the inflationary pressure of those high energy prices finally break through into the broader consumer price metrics in both Europe and the US.

This has been the fear from the beginning of the war with Iran: energy supply shocks from disrupted Persian Gulf oil flows would result in global stagflation. Throughout much of the summer, with President Trump and the IRGC doing an endless on-again, off-again cycle of escalation and peace negotiation, that fear was held back, as the price impacts remained confined largely to the energy sector. As of last month, that fear is finally becoming a reality.

Not Done Yet

We do not need to read the latest warnings from the UKTMO about IRGC attacks in the Strait of Hormuz to know that the oilpocalypse has arrived, nor do we need to see inflation data from around the world. We can see the impact of the oilpocalypse directly in the price of fuel at every fuel pump in the United States.

The oilpocalypse is here. Its impacts are real. Its price effects are real.

Nor do we need expertise in oil logistics or military strategy to see that the wars which have brought oilpocalypse down on the world show no sign of ending any time soon. Both the war in Ukraine and the war with Iran have devolved into slow, grinding wars of attrition, with both sides believing the other side will eventually suffer more damage than it is willing to accept, and with both sides consequently suffering far more damage than was ever anticipated.

Despite the damage, despite the global economic shocks brought on by these wars, peace remains not only elusive, but largely rejected.

Neither war is done yet. Neither conflict is finished wreaking economic chaos on the world. Neither pair of belligerents is ready to do what they must to end the war and pursue lasting peace instead.

The wars therefore continue. The attrition continues. The oilpocalypse continues.

We cannot say how much worse the oilpocalypse will get. We can say that, so long as these wars persist, the oilpocalypse will continue to get much worse.

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September’s Producer Price Index Summary is even worse news. Coming in above forecasts, producer prices for September are signalling that inflation will keep rising for the next few months, and that inflation will continue to spread across the wider economy beyond energy.

The Producer Price Index for final demand increased 1.3 percent in September, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices moved up 0.5 percent in August and 0.2 percent in July. (See table A.) The September increase is the largest advance since rising 1.7 percent in March 2022. On an unadjusted basis, the index for final demand climbed 6.3 percent for the 12 months ended in September, the largest 12-month increase since moving up 6.4 percent in December 2022.

In September, prices for final demand goods rose 2.6 percent, and the index for final demand services advanced 0.8 percent.

Prices for final demand less foods, energy, and trade services moved up 0.5 percent in September after increasing 0.3 percent in August. For the 12 months ended in September, the index for final demand less foods, energy, and trade services rose 5.0 percent.

Printing at 6.3% year on year, producer price inflation came in an entire percentage point above Wall Street’s consensus estimate.

Energy prices continued to be a major inflationary pressure within the PPI, but goods besides energy as well as the various components of services all printed significant increases in their inflation rates.

The scope of the inflation increase not only signals that we can look forward to even more inflation, but that we will be seeing more inflation in more economic sectors. Contagion from the oilpocalypse’ rising energy prices is pushing more and more prices up.

The worst case oilpocalypse scenario is becoming increasingly inevitable.

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Corporate Media Was Alarmed—But With Reason?

As was true with the CPI report, corporate media wasted no time before focusing on the PPI report’s negatives. This time, however, they were not necessarily wrong.

As CNN reported (accurately, for a change!), September 2026 saw the fastest rises in producer prices since 2022.

Economists had expected September PPI to increase 0.5% from August and 5.3% annually, according to FactSet. Instead, September marked the fastest monthly increase since March 2022 and the highest annual rate since December 2022, the year when US inflation hit a 40-year high.

Energy prices, driven higher by geopolitical conflicts including the war with Iran, drove September’s increase, accounting for 80% of the 2.9% leap in goods prices. That’s the largest-ever monthly increase, according to BLS data that goes back to 2009.

According to CNBC, rising diesel prices are a primary factor in the price increases for a widening number of producer prices.

But there are signs that soaring energy prices are having downstream effects on other categories. The BLS said in Thursday’s release that almost half of September’s increase in processed goods for immediate demand was connected to the rise in diesel fuel prices.

Strangely enough, Wall Street’s reaction was rather quiescent. After falling on Wednesday after the CPI report, equities rose throughout the day yesterday.

Treasury yields didn’t even spike on the PPI report’s release, choosing instead to go straight into decline.

Rising equities and falling yields are market movements we generally associate with good economic news. All things being equal, we would never expect Wall Street to be nonchalant about accelerating inflation, yet that is exactly how Wall Street responded to the Producer Price Index report.

All PPI Sectors Were Up

The PPI report was not good news simply based on the report's headline inflation numbers. An increase of 6.3% year on year was a major increase in the pace of producer price inflation and a continuation of August’s surge.

Month on month, not only did headline inflation surge within the PPI, but core inflation reversed a recent disinflation trend, rising 0.5% month on month, the third worst core inflation print for the PPI this year.

Within the PPI report’s details, inflation for final demand energy was elevated as expected.

What was not expected was that energy price inflation within the PPI would more than double, month on month, to 10.8%.

Even worse news was food flipping from August’s deflation print to a 1.2% rise month on month.

September was the second worse month this year for food price inflation within the PPI.

Goods price inflation more than doubled from August to 2.6% month on month.

The impact of energy prices on goods prices is immediately visible when we look at the two side by side.

One small bit of comfort in the PPI report: without food and energy, goods prices cooled in September.

However, service prices surged to 0.8% month on month.

Service prices not only rose, they reversed a two-month disinflation trend to post their second worst monthly inflation figure for 2026, and the third worse since the start of President Trump’s second administration.

That trend reversal is the most notable—and the most concerning—aspect of the PPI report. Core inflation and service price inflation had been trending down. In September that trend not only reversed, it became an indisputable surge in prices across the board.

Intermediate Demand Confirms Contagion Effect

Final demand inflation figures were, on their own, quite enough bad news for any inflation report. To that bad news, however, we must also add intermediate demand’s inflation surge, which shows that there is more consumer price inflation still to come.

The largest surge came in Stage 2—an interesting shift from August—but we must note that producer price inflation increased across all four stages of intermediate demand. Rising inflation this month in intermediate demand indicates rising inflation within the CPI report.

The other contagion marker within the PPI was the surge of inflation within the components of the service price category.

Transportation and warehouse prices especially had been cooling before rising again in August.

Transportation and warehousing services are, of course, cost elements for consumer goods. Just as was the case in August, September’s service price breakdown shows the contagion effect spreading inflation throughout an economy.

Given that we can generally view the Producer Price Index as a leading indicator of what is about to happen in the Consumer Price Index, the surge within the PPI of inflation for Transportation and Warehouse services is a grim forecast of what we can expect over the next few months within the CPI.

Inflation Is Here. Inflation Is Getting Worse

There is no good spin to put on the September PPI print. Just as the CPI print shows a surge of consumer price inflation that is long overdue, the PPI print shows the producer price inflation that was always inevitable, given what has been happening with energy supply since February.

Longtime readers will recall that even in July, when there was little producer price inflation at all, my assessment was that, if war with Iran continued long enough, if the oil supply shock endured long enough, oilpocalypse was not only assured but that it would lean towards the worst case scenario.

There was no magic and certainly no crystal ball in that assessment. Lack of oil and lack of diesel drive up prices within energy markets, which eventually translates into higher prices at the fuel pump. As diesel is an essential cost for nearly all freight, if pump prices rise, freight becomes more costly. Inflation spreads throughout an economy. That much is economics 101

The question of higher inflation as a result of the war with Iran was never a question of “what”. It was always a question of “when”.

We now are seeing the question of “when” answered—and the answer is “now.”

The war with Iran continues. While much has been done to restore traffic through the Strait of Hormuz, it remains a contested waterway.

We must also add Russia’s war in Ukraine into the mix. Ukraine has had great success launching drone strikes on Russia’ oil refining infrastructure, and that impacts global supplies of diesel as well.

When we look at what is happening in the world, we see very few signs if any that the dislocations within global oil and energy markets are about to be resolved. As I said in July, so long as these dislocations persist, they will push prices up.

So long as these dislocations exist, we will see producer prices pushed higher, and then through contagion we will see consumer prices pushed higher.

Unless there is a sudden outbreak of peace in the world, energy price inflation will continue. Unless there is a sudden outbreak of peace in the world, energy price inflation will push up fuel costs, push up transportation and freight costs, and that will push up prices beyond energy goods and services.

Unless there is a sudden outbreak of peace in the world, energy price inflation within the September Producer Price Index confirms that the oilpocalypse is unfolding almost inexorably towards the worst case scenario.

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The September inflation report confirmed what real world prices have been saying: energy price inflation is getting worse. It may also be starting to impact other prices as well.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent on a seasonally adjusted basis in September after rising 0.4 percent in August, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.7 percent before seasonal adjustment.

The index for gasoline rose 9.1 percent in September, accounting for over half of the monthly all items increase. The energy index increased 5.2 percent over the month following a 2.1-percent increase in August. The shelter index rose 0.4 percent in September after rising 0.3 percent in August. The index for food was unchanged in September, as the index for food away from home increased 0.2 percent and the index for food at home fell 0.1 percent.

The index for all items less food and energy rose 0.3 percent in September, as it did in August. Indexes that increased over the month include recreation, used cars and trucks, education, airline fares, medical care, and apparel. Conversely, the index for communication was among the small number of major indexes that decreased in September.

The all items index rose 3.7 percent for the 12 months ending September, a larger increase than the 3.4-percent increase reported for the 12 months ending in August. The all items less food and energy index rose 2.6 percent over the year, following a 2.4-percent increase over the 12 months ending August. The energy index increased 20.4 percent for the 12 months ending September. The food index increased 2.5 percent over the last year.

Inflation was up more than expected. Wall Street, Trading Economics, and the Cleveland Fed inflation nowcast had all projected inflation to come in 0.1pp lower than it did.

Inflation is up across most price categories. Even services and shelter printed hotter.

With broad price increases across multiple sectors, are we finally seeing the contagion effect that has always been a lingering possibility from the energy supply shock of the “oilpocalypse”? The data says that may very well be the case.

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Corporate Media Overreacted…Again

The inflation report was not good. Corporate media, predictably, played up the negatives in Wall Street’s reaction.

U.S. stocks closed sharply lower Wednesday, October 14, as accelerating inflation fueled expectations of additional Federal Reserve interest rate increases, sending technology shares tumbling and placing renewed pressure on companies heavily invested in artificial intelligence infrastructure.

The Nasdaq Composite fell approximately 1.9%, while the S&P 500 declined 1.1%, marking its largest single-day percentage loss since July 29. The Dow Jones Industrial Average slipped 0.1%, according to Reuters’ market report.

Equities were down on the day, although they did rebound towards the end of the trading day.

Even alternative media outlets decided to hyperventilate, with ZeroHedge going more for clickbait than for journalism.

What gets lost beneath the florid headline is the reality that, after an initial surge Treasury yields ended the trading day down across the yield curve.

The bond vigilantes literally decided to shrug off the inflation report as the day went on.

As for fears that the Fed is going to raise interest rates at the October FOMC meeting, as of this writing the odds still favor the Fed standing pat.

The FOMC meeting is still two weeks away, and the probabilities are sure to shift more between now and then. For now, however, we cannot presume the Fed will for certain raise interest rates; even Wall Street is not convinced of that.

Inflation Is Up

We should not pretend that corporate media’s exaggerated pessimism means inflation did not heat up in September. That it clearly did.

We can see that in the year on year numbers.

We can see that in the month on month numbers.

With September having been a weak month for jobs and wages, the hotter inflation print did not help move affordability in the right direction. When we index wages and prices to January 2021, we can see that wages still have not caught up to food and service price inflation, and service wages especially fell further behind in September.

These inflation numbers are not going to help President Trump and the MAGA Coalition as people head to the polling booth to cast their votes in the midterm elections. They are moving in precisely the wrong direction to do the MAGA Coalition any good.

Prices Are Up Across The Board

There is no surprise that energy price inflation was up. Nor was there any surprise that diesel and gasoline were the reasons why energy price inflation was up.

Far more disconcerting, however, is that durable goods prices surged in September.

Nondurables, Services, and even Shelter all rose month on month in September.

The one notable category where inflation cooled somewhat: Food.

While the downward trend in food price inflation month on month is inarguably a good thing, it is the sole bright spot in an otherwise glum inflation report. In every other major category, inflation rose, in some sectors significantly.

Computers Contributed?

While the anticipation has been that inflation is rising, one of the more interesting predictions was the guesstimate that semiconductor prices would play a major role in driving inflation during September.

The artificial intelligence buildout has also sharply elevated the cost of semiconductors, computer equipment, and electrical components, which have been passed into costs for consumer electronics such as gaming devices, laptops, and smartphones.

On September 1, Nintendo increased the price for its Switch 2 gaming system by 11% to $499.99. And Apple’s newest iPhone, the iPhone 17, cost about 10% more than its previous upgrade, though some of that likely reflects greater capabilities.

However, according to the BLS report, prices for computers and computer components rose more slowly in September, with prices for Communications, Information Processing and Information Technology actually printing deflation.

With peripheral price inflation within computer technology easing from last month, whatever is driving higher prices, the tech sector contributed more to overall inflation in July and August. As an inflation driver, the tech sector is currently fading in influence.

Was This Predicted?

We do well to remember that prices for intermediate demand within the August Producer Price Index signaled rising inflation was in the near future.

After two cool months with deflation within the intermediate demand PPI, the August signal was unmistakable.

Did that signal land in September’s CPI print with a vengeance? That is not an unreasonable read on the data.

That read is made even more likely when we look directly at diesel and gasoline prices, which have risen sharply over the summer.

We get an additional signal from the August PPI’s transportation subindex.

Rising transportation prices mean rising transportation costs for goods and services.

Are we seeing the impact of August’s rise in transportation prices/costs in the September consumer price data? With the rise in fuel costs—a rise which is still largely continuing—that is certainly a plausible and even probable interpretation of the data.

Inflation Is Rising…Finally

Longtime readers may recall that I have said in the past that higher inflation was going to result if the oil dislocations from the Persian Gulf persisted.

Regardless of what the CPI data set shows for July, there is no doubt that energy prices rose in July. Crude oil, RBOB Gasoline, and diesel all showed significant price increases over the month, yet none of it charted for July.

Curiously, the Producer Price Index for July also failed to capture any of the July energy price increases.

Whether this month or next, those price increases will percolate into the CPI and PPI data sets before too long.

With both Iran and the US continuing their economic brinksmanship over the Strait of Hormuz, not only should we anticipate August or September capturing the July energy price increases, we should be watching for signs of the second wave oil supply shock I call the “oilpocalypse.”

What we are seeing in the September CPI aligns very well with the projections I made in July.

Will there be more inflation yet to come? Probably. While oil prices have come down, albeit slowly and stubbornly, diesel crack spreads are not coming down at all.

The primary driver of energy price inflation is fuel costs, and the market data shows that fuel costs are not going to get better just yet.

We already saw transportation shoot up in the August PPI. We should not be surprised if we see that happen again in the upcoming September PPI report.

At the same time, personal consumption data last month did not show that rising demand was a significant factor in rising prices. We have seen consumption rising steadily over the summer, but we have not seen inflation trends to match. Only energy prices have been a consistent upward pressure on the price indices.

While that will not help President Trump and the MAGA Coalition with upbeat economic messages heading into November and the midterm elections, that is a point we can only hope someone at the Fed points out to Kevin “Completely Wrong” Warsh and the rest of the FOMC. We are not seeing the sort of inflation that is easily responsive to incremental adjustments of the federal funds rate. Demand-driven inflation can plausibly ease with such microadjustments of interest rates, but we are not seeing demand-driven inflation. We are seeing the results of prolonged disruption of energy supply.

Whenever a supply shock is introduced, the only way for market equilibrium to be restored is for demand to come down proportionally. Supply shocks can only be resolved through demand destruction and recession. Tweaking the federal funds rate in this macro environment will not ease inflation. All it will do is undermine a still fragile jobs recovery.

How much more inflation will we see? A lot of that depends on what happens next in the ever-changing geopolitical dynamics surrounding oil and its refined products. If Russia is allowed to return to diesel exports, that inflation driver may ease. If the Arab nations in the Persian Gulf are able to repair their damaged oil refineries, that inflation driver may ease. If a lasting peace with Iran fully reopens the Strait of Hormuz that inflation driver may ease.

If. If. If.

Those are the great uncertainties behind the inflation data. The main drivers pushing energy prices up remain geopolitical events, and those are eternally unpredictable.

We can plausibly say that, so long as tensions continue in the Persian Gulf, so long as the Saudis and the Houthis are at war, so long as Ukraine can target Russian refineries at will, the energy supply shock will continue. Rising energy prices will continue. Rising transportation prices/costs from rising energy prices will continue.

Will those events continue? That we do not know. At present it is more reasonable to calculate they will than it is to assess that they won’t.

Inflation is rising at last. The oilpocalypse says we should expect it to get worse before it gets better.

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Then the ESS actually dropped. Then jaws dropped—including mine. The September jobs report didn’t just underperform. The September jobs report went completely cold.

Both nonfarm payroll employment (+29,000) and the unemployment rate (4.2 percent) changed little in September, the U.S. Bureau of Labor Statistics reported today. Employment in all major industries changed little over the month.

The actual results were not even a fraction of what had been projected just the night before.

Wall Street expected another strong month. Prediction markets anticipated another strong month. ADP pointed to another strong month.

Wall Street was wrong. Prediction markets were wrong. ADP (apparently) was wrong.

Whisky Tango Foxtrot?

Did job markets reverse suddenly in September? Has the war with Iran finally hit the economy where it would really hurt? Did Lou Costello Labor Math take a larger than usual bite out of the job figures?

Did all of the above play a role?

Regardless of the precise mix of forces which converged to produce September’s grim BLS job report, one reality made abundantly clear is the ongoing frailty of US labor markets and the still-nascent jobs recovery.

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Was It Lou Costello Labor Math?

As with the August numbers, whenever the BLS jobs data is unexpected, we have to consider the possibility that the data itself might simply be garbage—what I call “Lou Costello Labor Math”, in homage to the classic Abbott and Costello sketch where “Thirteen goes into twenty-eight seven times.”

Are there signs the data is tainted? Possibly. In an unusual reversal of previous data, in September the anemic payroll data from the Current Employment Statistics contrasts with a continued rise in the Employment Level from the Current Population Survey.

As the chart clearly shows, starting with 2026 the Employment Level has been dropping in this country through July. In August, and then again in September the Employment Level increased well above the growth trend shown in the payroll data.

The two labor metrics theoretically should sample approximately the same data, which means the trends should be broadly similar. With the Employment Level moving on a different trajectory from the All Employees data, we at the very least have reason to question the data itself.

We should pause to note that the recent trend variances between the Employment Level and payroll job levels in the US economy are not a new development. The Employment Level growth trajectory began to deviate from payroll growth in the spring of 2022—the period when we can clearly see Lou Costello Labor Math become a recurring theme within the BLS job data sets.

While that phenomenon had largely disappeared for 2025, it returned with a vengeance in the first half of 2026, although the August and September job reports suggest a reversion to mean may be underway, correcting the 2026 variances.

That the revisions applied to July and August were both large and both negative is another indication the data is of poor quality. Readers may recall from last week when I was discussing the August JOLTS report, I anticipated there would be large downside corrections in the September jobs report.

Also pointing towards sizable corrections to the ESS data are the sector-level variances between the JOLTS and ESS data.

For Trade Transportation and Utilities as well as Healthcare, the JOLTS data printed well below what job growth reports on the ESS. The sectors where the JOLTS data came in larger than the ESS data had significantly smaller variances.

When the September ESS comes out, we should anticipate substantial downward revisions, particularly in TTU and Healthcare. However, it is possible we could see some upward revisions in Manufacturing and Construction especially.

The September jobs report erased some 60,000 jobs from the prior two months.

The change in total nonfarm payroll employment for July was revised down by 31,000, from +21,000 to -10,000, and the change for August was revised down by 29,000, from +162,000 to +133,000. With these revisions, employment in July and August combined is 60,000 lower than previously reported.

For the year, the BLS has overstated job growth by a cumulative 116,000 jobs.

July, which had been upgraded to job growth in August, was downgraded once more to job loss.

We should note, however, that even with the 60,000 jobs erased, August still shows 133,000 jobs created. That is still not a bad job growth figure for the month.

There are signs that the BLS data continues to struggle with poor quality estimates and modeling, but there remains good support for August being a strong jobs month even so.

More than Lou Costello Labor Math is likely to be at work on the September jobs numbers.

Wishful Thinking?

One factor that may have played into high hopes for the jobs report was simple wishful thinking.

After the strong August jobs report, the financial media had been speculating about the possibility of a “September surge”.

There’s a popular belief that the job market kicks into high gear in early autumn, commonly known as the “September surge.”

According to Katie Martocchio, senior talent acquisition manager at software company Prompt, the month of September brings a spike in productivity for employers and job seekers alike.

Coasting off of fall’s “back-to-school energy,” companies start “getting back into the groove” after Labor Day, she says, and year-end goals become top of mind.

“Now is the time that we can onboard someone, and they can help support and drive those goals to that finish line,” Martocchio says.

Even as late as September 22, employment “experts” were anticipating at least a “bump” in employment.

Amanda Augustine, a career coach and resume writer, says she expects to see a “bump” in hiring this fall, rather than a “surge.”

But it’s unlikely that momentum will last through the rest of the fall, according to Augustine, and “while it’s a bit more of a positive job market, that doesn’t mean it’s necessarily going to be an easy job market for everyone.”

Prediction markets apparently latched on to the August numbers and projected that September would be in the same range.

Following August’s bigger-than-expected employment report — where the U.S. added 162,000 jobs during the month — traders on prediction market platform Kalshi think there’s a 60% chance the country added more than 90,000 jobs during September.

Speculators also think there’s almost 50-50 odds that the report is once again in six figures. That’s higher than the Dow Jones consensus economist consensus forecast of 84,000.

Polymarket was even more optimistic, with predictions of job growth above 50,000 surpassing 86%.

Did a desire for optimistic results crowd out signals within the extant data?

Possibly—although when assessing the August JOLTS data, the PMI metrics arguably pointed towards ongoing job market strength. The S&P Global PMI metrics for September also fit well with ADP’s own strong jobs report. Were the PMI surveys unreasonably optimistic, or was my read on them unreasonably optimistic? Given where the BLS jobs numbers printed, both possibilities cannot be discounted.

Were there signals within the jobs data that deserved greater attention than they received?

Signs Of Weakness Ignored?

When we look at the job growth figures for all sectors in 2026, we do not see clear trend of increasing job market softness.

When we consider what the all sectors data showed for August, if anything the trend indicated growing job market strength.

Looking at the Total Nonfarm numbers vs where they were in August, we do see increasing labor market softness from March onward, which was overshadowed by the unexpected August rebound.

The Total Private data, which excludes government payroll changes, arguably showed a recovery starting in July from a horrid June.

The difference in the job prints, of course, is the erasure of 60,000 jobs in July and August, something the JOLTS data signaled was a distinct possibility.

Manufacturing, which is now showing increasing softness after July, was showing growing strength in August.

Before September’s revisions, Construction was also showing increasing strength rather than decreasing.

Healthcare hiring peaked in January, and the macro trend ever since has been less and less hiring. That trend was visible in August as well.

One signal that the ESS data was overstated in August was plainly visible in the August JOLTS data—August Private Net Hiring came in 42,000 jobs below August Total Private payroll data.

In hindsight, this variance probably warranted greater emphasis than I gave it, as the September revisions made much of that variance evaporate.

There were some indications that job markets were softening in August, but many of them only became clear downward trends after the September revisions.

With the ADP jobs print at 70,000 jobs for September, it is unlikely, given the state of the jobs data as of August, that Wall Street estimates and even prediction market estimates would have come in much below the ADP number.

Current Population Survey Data Looked Rather Good

Standing at odds with the anemic headline payroll data are several metrics from the “Household” survey, aka the Current Population Survey.

The Employment Level rose to a seasonally-adjusted 163,152,000 persons in September, the second consecutive month of increase after being in decline all year.

At the same time, the cohort of people Not in the Labor Force dropped for the second consecutive month.

These shifts in the labor force have had a positive effect on the Employee-Population Ratio, which also rose for the second consecutive month.

While the number Not in the Labor Force who want a job now—a cohort I add to the official unemployed number to get a “real” unemployment level—did rise by 43,000 in September, that was a smaller rise than the official unemployment level.

As a direct consequence, the real unemployment rate, while still significantly higher than the official (U-3) unemployment rate, increased by less than the official employment rate.

Since last fall, both the official and real unemployment rates have been trending down, and September is not nearly a large enough rise in unemployment to constitute a trend reversal in unemployment.

We should also note that continuing unemployment claims as reported by the Department of Labor trended down throughout September.

As dismal as the headline payroll number was for September, the Household Survey data was substantially more positive.

Does this mean we will see positive job revisions when the October ESS prints? We should not discount that possibility. When the September JOLTS report comes out in a couple of weeks, we may see some signals about that for October.

Wages And Earnings Did Not Improve

While the Household Survey indicates the jobs outlook for the US may not be as dismal as the headline payroll number indicates, there is no denying that average weekly earnings growth slowed sharply in September.

Goods-producing jobs saw average weekly earnings decline, and overall earnings went from one of the best months in President Trump’s second Administration to one of the worst.

While a few sectors saw earnings improvements, earnings growth was softer for most sectors in September.

While we will need to see the September inflation print to have a current outlook on where wages stand relative to the hugely distorting 2022 hyperinflation cycle, it is already clear that, barring an unlikely bout of price deflation, most wages will not have gained ground on where they need to be to eliminate the negative effects of 2022.

We should note, however, that the lag is still entirely within the realm of the Biden-Harris Reign of Error. Since 2025, average weekly earnings have, for the most part, stayed ahead of inflation.

Goods producing jobs especially have done well for themselves even with the September weekly earnings decline.

We should note that, during the August surge, wages also rose. Soft labor markets are also soft wage markets as well, as it is difficult to push wages up unless there is a significant increase in at least sector-level demand for workers.

ADP vs BLS: Which One Is Right?

As longtime reader asked on last week’s ADP writeup, “So where is the job growth????”

Depending on which report you trust, the ADP or the BLS report, the answers will vary significantly.

Since January 2025, both reports show that total private employment has increased approximately 0.7%.

At least half of that growth—70% of job growth on the ADP report—occurred year to date in 2026.

In manufacturing, there has been very little job growth per the ADP report this year, which shows manufacturing as of September at 98.7% of where it was in January 2025. Even the BLS data showed manufacturing at 99.8% of January 2025 levels.

While the BLS data shows a clear recovery trend in 2026, ADP is broadly just hanging on.

Healthcare, on the other hand, showed a solid ~1.4% growth since January 2025.

ADP has Leisure employment up 1.1% since January 2025. The BLS has Leisure up 0.8%.

While the sector-level data is uneven (and perhaps naturally so), overall there has been at least some payroll job growth in this country.

In 2025 the BLS reported 161,000 new payroll jobs after corrections were applied. Thus far in 2026, the BLS data has far surpassed the 2025 total new jobs, printing about 612,000 jobs after corrections and revisions have been applied.

However, over the same time frame that payroll jobs have grown, the BLS data also shows the overall employment level to have dropped by 679,000. The civilian labor force has shrunk by about 434,000. The number not in the labor force has risen 3,303,000 over the same period—while the civilian population in the United States has only risen 2,869,000. As a direct result of this, the Employment-Population Ratio for the United States has fallen from 60.1% in January 2025 to 59.2% as of September 2026.

The cumulative effect of the revisions, the arguably bad data, and the labor market trends the data more or less reports, a smaller proportion of the United States population is working now than when Donald Trump returned to the Oval Office.

In 2026, the Trump Economy has reversed a years-long decline in Manufacturing employment, and might even succeed in recovering all the Manufacturing jobs lost in 2025. Given the state of the economy and the duration of the jobs recession when President Trump returned to the Oval Office, there is a measure of success in that.

Yet there is no escaping the reality, often overlooked month on month, that since January 2025, the Trump Economy has lost workers, and has at the very least not provided nearly enough jobs to compensate for the population growth since then. That is a track record which invites comparisons to 2023 and 2024, when employment growth under Biden largely stopped (thus triggering the jobs recession).

In 2026, there have been clear sector level job gains in the US economy. Overall, the US economy is showing 773,000 jobs added since January 2025, with the bulk of those jobs coming year to date in 2026.

A jobs recovery is underway in the United States. The accelerated pace of payroll job growth for 2026 over 2025 clearly shows that. However, just as with wages recovering from the 2022 hyperinflation cycle, a full jobs recovery is sure to be a long and relatively drawn out process, during which time US jobs markets are going to remain more frail than many economic “experts” such as those at the Federal Reserve want to admit.

With just 29,000 payroll jobs added in September, and 60,000 jobs from the prior two months erased, the September Employment Situation Summary is a reminder of just how frail US job markets continue to be.

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When the ADP National Employment Report for September was released the other day, we got to use two other words to describe it: great news. ADP’s Chief Economist Nela Richardson summed the report up succinctly.

“It’s a strong report. After a three-month slowdown, job creation rebounded and pay growth remained solid.”

It was a strong report—strong enough to surpass Wall Street expectations by some 20,000 jobs.

The ADP jobs report gains added heft through other data which provide good confirmation that the numbers are at least broadly correct.

ADP is reporting that there were 90,000 more jobs at the end of September than at the beginning. Going from 38,000 jobs in August, that is a remarkable turnaround

The jobs recovery will last a little while longer!

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Unemployment Claims Confirm The Data

A quirk of timing makes this week a distinctly crowded week in terms of official economic data. In addition to the August Personal Income and Outlays report coming out on Wednesday alongside the ADP jobs report, the BLS’ Employment Situation Summary prints today, and yesterday saw the weekly unemployment numbers released.

With September only just ended, the weekly unemployment data provides a clear confirmation that the ADP numbers are not wrong.

In the week ending September 26, the advance figure for seasonally adjusted initial claims was 197,000, a decrease of 1,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 197,000 to 198,000. The 4-week moving average was 200,000, a decrease of 2,500 from the previous week’s revised average. The previous week’s average was revised up by 250 from 202,250 to 202,500.

The advance seasonally adjusted insured unemployment rate was 1.1 percent for the week ending September 19, unchanged from the previous week’s unrevised rate. The advance number for seasonally adjusted insured unemployment during the week ending September 19 was 1,701,000, a decrease of 11,000 from the previous week’s revised level. The previous week’s level was revised down by 7,000 from 1,719,000 to 1,712,000. The 4-week moving average was 1,723,750, a decrease of 18,500 from the previous week’s revised average. The previous week’s average was revised down by 1,750 from 1,744,000 to 1,742,250.

At 197,000, the initial claims data declined for the fourth consecutive week even after revisions.

Far more significant, however, is the longer term decline in initial unemployment claims stretching back to June of 2025. Since last summer, initial claims have dropped by over 40,000. The jobs recovery which began earlier this year arguably has been gathering momentum since that time.

The 11,000 drop in continuing claims is also the continuation of a long-term trend, although one beginning slightly more recently, in November of last year.

In the Trump economy, fewer people are becoming unemployed, and fewer people are remaining unemployed for very long. A jobs recovery requires more than that—a jobs recovery requires sustained substantial job growth—but people not being put out of work is a very important first step in having a sustained jobs recovery.

ADP Report Shows Broad Hiring Across Most Sectors

With only three sectors showing job loss for September, the ADP report shows job growth in September that is not only substantial in size but is broadly based as well. Job growth that is spread across multiple sectors is a stronger signal of economic health than job growth that is concentrated in only a single sector.

As has so often been the case, Healthcare had the biggest gains at 55,000 jobs.

Leisure came in a strong second at 22,000 jobs, and Manufacturing was right behind that at 17,000 jobs.

The surprise jobs loser for the month was Finance, shedding 16,000 jobs in a surprising reversal from a strong summer of job growth.

Information eked out a small reversal to the upside, producing 4,000 jobs. Mining and Professional Services, which have been languishing for some time, continued to suffer job loss in September. Trade, Transportation, and Utilities, which has shown job loss for the past two ADP reports, managed to break even.

The cumulative impact across all sectors was the strong headline number.

This was healthy job growth in September, and a clear continuation of the jobs recovery. That is welcome clarity after the poor job reports from July and August.

PMIs Still Agree

As I mentioned when discussing the August JOLTS report, the Purchasing Manager Index data from the Institute for Supply Management provides clear confirmation signals that the job growth we are seeing is real.

To that set of positive signals we can add the PMI data from S&P Global. While S&P Global has shown Manufacturing to be solidly in expansion territory for virtually the whole of the second Trump Administration, in September that metric surged yet again, to 55.9.

Services showed a similar burst of new expansion, rising to 58.7.

Ironically, the Composite S&P Global PMI shows an economy that has been gaining additional strength and momentum ever since the start of Operation Epic Fury and the war with Iran.

Has the war been “good for business”? Wars quite frequently stimulate a nation’s economy, at least at first, as the government presses large amounts of resources into action to further war aims. Over time, as resources are pulled away from private sector consumption, inflation can set in, and wartime resource needs can distort an economy from what it would be during peacetime.

We also have been witnessing the economic destructiveness of war in Putin’s war in Ukraine for both Russia and for Europe. We should not pretend the war with Iran is incapable of inflicting similar attritional damage on the US economy should it continue for a long enough period of time.

At present, however, such risks are future potentials for the United States.

ADP Jobs Report Answers JOLTS Question: This Is Lasting

The JOLTS report wrapped up the employment picture for August largely presenting a single question: would the jobs recovery last?

The September ADP jobs report is giving us a preliminary positive answer to that question: the jobs recovery is lasting, for now.

All of the external data sets which confirm the job growth in the August JOLTS are fresh enough to confirm the September ADP jobs report as well. Given those external numbers and the strong JOLTS job growth figures, we should not be surprised that ADP had a strong jobs print for September. A number of signals pointed to exactly that outcome.

To those signals we can add the growing expansion being depicted in the S&P Global PMI data, as well as the Department of Labor’s weekly unemployment claims. These are two more data sets providing yet further confirmation that the ADP jobs numbers are real. These are also two more data sets which signal the September Employment Situation Summary will also be a strong report.

Small wonder Wall Street is projecting the September ESS will show 90,000 jobs.

We know the jobs recovery will not continue indefinitely. Eventually we will see another significant slowdown in job creation. Even without the bumbling nuisance of Kevin “Completely Wrong” Warsh choosing to risk the jobs recovery for the sake of the Fed’s “Holy Grail” inflation target, there will come a point where this jobs recovery, like all economic expansion cycles, will peak and then start to reverse.

The recent surge in global bond yields may very well be what derails this jobs recovery. Rising yields mean falling bond prices, but falling bond prices means a rising cost of capital. Borrowing costs are rising for businesses everywhere, including here in the US. If the yields rise far enough and stay elevated for long enough businesses both large and small will be constrained to cancel or at least delay the sort of investments needed to propel ongoing job growth.

The risks which could upend and halt this jobs recovery are quite real, and should not be ignored. However, future risk is not present calamity. Forces unfolding in the global economy may yet disrupt job creation here in the United States, but so far that has not happened.

We cannot say with certainty that October will be a strong month for jobs. ADP is already saying with certainty that September is a strong month for jobs.

The jobs recovery is going to last at least a little while longer.

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From the preceding month, the PCE price index for August increased 0.3 percent. Excluding food and energy, the PCE price index increased 0.2 percent.

From the same month one year ago, the PCE price index for August increased 3.4 percent. Excluding food and energy, the PCE price index increased 3.0 percent from one year ago.

However, while there was some inflation, there was not as much inflation as either Wall Street or the brain trust at the Fed expected.

Wall Street had been expecting 3.7% inflation year on year, but only got a 3.4% print. Month on month, Wall Street had expected 0.4%, but only got 0.3%.

Even the Cleveland Fed’s inflation nowcast was unusually wide of the mark.

The Cleveland Fed’s inflation nowcast projected headline PCE inflation at 3.8% and core inflation at 3.4% year on year. Actual headline inflation was 3.4% and actual core inflation was 3% year on year.

Month on month inflation did pick up from July. That was all it took to make corporate media happy—a small increase in month on month inflation (a very small increase).

Note, however, that a month on month incremental rise in consumer price inflation is not the same as a trend of rising inflation. Aside from energy we haven’t seen such a trend all year.

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Corporate Media As Stuck On 2% As The Fed

Corporate media is perhaps the only entity more obsessed with the 2% “Holy Grail” inflation figure than the Federal Reserve itself.

The only thing making inflation “elevated” or “high” is that it is above 2%. That much is evident just by looking at the headlines corporate media put out in reporting the PCE inflation data.

Relatively Trump-friendly Fox News acknowledged the overall trend of inflation—but said it remained “elevated.”

CNN blamed inflation on the war with Iran (of course).

Reuters had perhaps the most honest take on the data, admitting that the inflation numbers put less pressure on the Fed to hike interest rates further.

While no one should pretend that 3.4% year on year inflation is “good”, that we are not seeing higher inflation—higher headline inflation, higher energy inflation, higher core inflation—despite an attritional and now largely economic war with Iran is by any measure quite remarkable. If there is one thing besides causing mass casualties at which war excels it is causing consumer price inflation.

Certainly the “experts” were anticipating more inflation than has been recorded for August. When even the Cleveland Fed’s inflation nowcast overshoots the mark, there is indisputably less inflation pressure on the US economy than anyone has been wont to believe.

For Once, “No Change” Gets It Right

Very often, when we see “no change” in news releases for the US government’s economic data, we have to take it with a grain of salt—government economic data can at times vary wildly from reality.

However, for the August PCE Price Index year on year inflation, “no change” sums it up rather well. Headline inflation year on year ticked up by less than 0.1pp, while core inflation barely rose 0.02pp.

For the year on year metric, those are inflation changes that almost don’t register.

Where we did see inflation rise was in the month on month data.

Yet even with inflation rising month on month, headline inflation was the 3rd lowest (2nd among months with positive inflation) for the year. August was core inflation’s 3rd lowest month as well. Overall, headline inflation per the PCEPI is still trending down from its March month on month peak.

We are seeing some inflationary pressure in the economy. We are not seeing a lot of inflationary pressure in the economy. For once, the realistic inflation assessment really is “no [real] change”.

Some Energy Inflation, Just Not A Lot

Energy inflation flipped from printing deflation for the past two months but still came in a little more than half the month on month inflation print from April or May, and well below the March surge into double digits.

This in a month when oil, diesel, and gasoline rose approximately 12%-15%.

This in a month when diesel crack spreads rose by more than $10/bbl.

With these price drivers pushing energy prices up, it is not hard to fathom why Wall Street expected inflation to print higher than it did.

Food Price Inflation?

Outside of the months when food price inflation was negative, August printed the second lowest food price inflation metric since the start of President Trump’s second term of office.

If we back out to the year on year level, food price inflation for August is below the Federal Reserve’s “Holy Grail” level of 2%.

Compared to energy price inflation, food price inflation is practically nonexistent.

This is a point which deserves some emphasis.

One reason the Federal Reserve monkeys with the federal funds rate is to maintain “price stability.” By law, the Federal Reserve is supposed to conduct monetary policy with a view towards “stable prices.” Broadly speaking, “stable prices” means purchasing decisions are not influenced by the price today vs the price tomorrow.

Price stability exists when average prices are constant over time, or when they are rising at a very low and predictable rate.

At the moment, food prices are quite clearly “stable”. We are not seeing sudden or rapid swings in food prices. Changes in food prices are hard to even detect relative to changes in energy prices.

Even core inflation has been broadly predictable at 3% year on year for several months. We can say that 3% is higher than 2%, but, in the wake of the 2022 hyperinflation cycle, the data also says that 3% has become the long-term norm for core inflation—that makes it predictable and therefore stable.

Energy Inflation Is Still All The Inflation There Is

When we drill into core inflation, we immediately see that food prices are not the only stable prices in the US economy. Energy prices are where most consumer price inflation is occurring at present. We can see that just by comparing energy price inflation to nondurable goods and services.

Energy prices, themselves a component of nondurable goods prices, account for the overwhelming majority of nondurable goods prices.

When we look at year on year inflation within nondurable goods and services prices, we can immediately see that, apart from energy, prices have been quite stable—service price inflation is hovering around 3.4%-3.5%, and nondurable goods price inflation has been reliably below 1.5%.

Remember, part of price stability is predictable rates of inflation. For services we are definitely seeing a predictable rate of inflation, and even nondurable goods are proving to be largely predictable outside of energy prices.

To underscore how little inflationary pressure we are seeing in the US economy at present, we do well to remember that real personal consumption expenditures have been increasing throughout the year.

If prices were unstable, this steady increase in real consumption would have resulted in rising consumer price inflation across the board. We aren’t seeing that, and haven’t seen that.

Even the surge of real personal consumption expenditures while real personal incomes dropped on the month has not been sufficient to generate broad-based inflation.

People are spending. People are buying things. People are not pushing up prices.

That is “price stability.”

Some Inflation, Just Not A Lot Of Inflation

While the headline month on month PCEPI inflation numbers show a marked increase in consumer price inflation, they do not show a big increase in consumer price inflation.

We have some inflation, and we are seeing some inflation increase, primarily energy price inflation. We do not have a lot of inflation, and even energy price inflation has been rising less rapidly than right after the beginning of Operation Epic Fury.

Despite the pearl clutching of CNN and other corporate media outlets, core PCEPI inflation has been hovering between 3% and 3.2% year on year since the start of the year. Even though 3% is above 2%, that core inflation remains within that range means people can reliably gauge prices for desired goods and services a week or a month from now—effectively removing the incentive and the pressure to buy now for fear of having to pay more next week or next month. 3% is higher than 2%, but it is no less predictable than 2%.

When price increases are not a material factor in purchasing decisions, by definition prices are stable. By that definition, we have had price stability for quite some time. By that definition, the Federal Reserve has no real reason to be raising the federal funds rate at all.

Corporate media almost concedes this last point. Remember, Reuters acknowledges that August’s low PCEPI inflation print removes a lot of pressure on the Fed to hike the federal funds rate at the end of next month. Price stability equates directly to a lack of pressure on the Fed to raise interest rates; if there is no pressure on the Fed to raise interest rates, prices must be stable.

Ultimately, the August Personal Income and Outlays report is a demonstration of price stability. The report gave us some inflation. The report did not give us a lot of inflation. The difference is the degree to which prices are stable.

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The number of job openings was little changed at 7.1 million in August, the U.S. Bureau of Labor Statistics reported today. Hires changed little at 5.2 million, while total separations were unchanged at 5.1 million. Within separations, quits (3.1 million) were unchanged, while layoffs and discharges (1.6 million) were essentially unchanged.

What that lead paragraph did not say was that total Nonfarm Net Hiring was 122,000 in August, and total Private Net Hiring was 85,000.

While smaller job increase numbers than the the August Employment Situation Summary, those numbers nevertheless bolster the jobs recovery narrative of the earlier jobs print.

Manufacturing showed strong job gains. Construction Net Hiring cooled somewhat but still printed an impressive figure.

Nonfarm Net Hiring and Private Net Hiring were not as strong as on the August ESS, but strong enough to allay concerns about Lou Costello Labor Math for at least the month. We may still see significant job corrections, and should probably anticipate reductions, but even with corrections August looks to remain a month of solid job growth across the board.

The JOLTS report is unquestionably a good report, and makes the case for solid job growth in August. Can the job growth continue into September?

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Openings Down, Separations Down, Hiring Up

According to the JOLTS report, total Nonfarm Net Hiring rose by 122,000 jobs in August.

What was even better about the job growth was that it came from an increase in hiring and a decrease in separations.

Job openings also ticked down in August, but the number of openings still exceeds total hires by so much that the number still is not a realistic depiction of the economy. If there were genuinely that many job openings needing to be filled in the economy, we would see far more hiring than we do, and more wage growth than we do.

Private Net Hiring was cooler than Nonfarm Net Hiring, with only 85,000 jobs added in August.

That amount of jobs growth was still enough to make August the fourth best job growth month on the year, and the seventh best since the start of President Trump’s second Administration.

Private Net Hiring was some 42,000 jobs below where the August ESS put private payrolls, indicating we may see sizable corrections to the August numbers in the September and October job prints.

Also pointing towards sizable corrections to the ESS data are the sector-level variances between the JOLTS and ESS data.

For Trade Transportation and Utilities as well as Healthcare, the JOLTS data printed well below what job growth reports on the ESS. The sectors where the JOLTS data came in larger than the ESS data had significantly smaller variances.

When the September ESS comes out, we should anticipate substantial downward revisions, particularly in TTU and Healthcare. However, it is possible we could see some upward revisions in Manufacturing and Construction especially.

Most Sectors Showed Job Growth

Manufacturing turned in a nice 21,000 job growth metric for August, beating the ESS data by 5,000 jobs.

This marked the third month that manufacturing has shown job growth, a welcome change from the hemorrhage of manufacturing jobs we saw in 2025.

Nor was Manufacturing alone, as August was one of the more balanced months for job growth across all sectors this year.

Perhaps unsurprisingly, Leisure was the big jobs producer, with 54,000 jobs according to the JOLTS data.

Government hiring came next, at 37,000 jobs—which was actually 43,000 state and local government jobs less 6,000 jobs lost at the federal level—with Construction right behind at 36,000 jobs.

Professional Services rebounded from a dismal July to produce 18,000 jobs in August.

The two job losers on the month were Trade Transportation and Utilities at 17,000 jobs lost, and and Healthcare, down 3,000 jobs.

While Trade Transportation and Utilities is typically a mainstay of job growth within jobs, that it was the only significant source of job loss highlights that job growth in August was real and broad.

That TTU had another month of job loss—months which are uncomfortably aligned with the escalations in the war with Iran and consequence surges in fuel costs—could also be a signal of where that war is hitting America. While we may not be seeing broad surges of consumer price inflation, energy price inflation may be costing Americans jobs. If that is the case, August’s surge in job creation may not be as long-lived as anyone would like.

PMIs Agreed For A Change

Bolstering the JOLTS report for August has been the August Purchasing Manager Index data from the Institute for Supply Management. While the PMI for Manufacturing Employment cooled in August, it still showed job growth for the month.

The overall Manufacturing PMI also showed some cooling, but still strong expansion.

Services were not quite as robust, with the ISM Services Employment PMI printing contraction for August.

However, the overall Services PMI strengthened in August.

According to the ISM, August was a very good month for the US economy. The August JOLTS report happens to agree.

Industrial Production Rising

Even the Federal Reserve’s own Industrial Production data points to an expanding economy and expanding employment.

Overall Industrial Production rose 1.4% year on year.

Since July of last year, Industrial Production has been charting increasing growth and expansion—exactly what needs to happen in order to sustain job growth in manufacturing.

Intriguingly, within goods production, Consumer Goods languished yet again, while Business Equipment production rose 7% year on year.

With the mid-term elections drawing closer, it is worth noting that equipment production has come on strong during President Trump’s Second Administration, even as Consumer Goods has not improved from the Biden Reign of Error. Arguably in keeping with President Trump’s campaign pledge to turn the US into a “manufacturing superpower”, the growth in business equipment production indicates an industrial shift in the US economy.

Will It Last?

There is no denying that the August JOLTS report is a good report. There is also no denying that the report is bolstered by other metrics as well, not the least of which are the Federal Reserve’s own Industrial Production data. We are looking at something more substantive than the statistical employment phantoms sometimes offered up by the BLS.

The ISM PMI data sets are another confirmation that the August JOLTS report is a solid and reliable metric of job growth in the United States. Government and private sector sources broadly agree that August was a good month for jobs.

After the grim job numbers for June and July, August was a welcome turnaround.

August’s strong job numbers naturally gives rise to the question “Will it last?” We will begin to see an answer to that question with the ADP National Employment Report (which will be released just as this publishes). Certainly Wall Street is anticipating a continuation of job growth, with an expectation of 70,000 jobs on the ADP jobs print.

The PMI data suggests that manufacturing especially has some growth momentum going for it, and that augurs well for the future of manufacturing employment. After years of abysmal manufacturing job loss, 2026 has become a year of solid manufacturing job gains in particular.

Service Employment PMIs are more problematic (a consequence of ongoing job loss in Trade Transportation and Utilities, perhaps?), but the broader Service PMI data suggests ongoing economic expansion, something which can only increase pressure on businesses to hire and create jobs.

The broader array of metrics and signals indicates August’s strong job numbers are not just a flash in the pan. At present, the reasoned expectation is that we will see strong job growth for at least the next month or two.

If the jobs recovery does continue, President Trump is likely to deliver at least in part on his campaign pledge to make the United States a “manufacturing superpower.” This would be particularly beneficial to working America. Not only are more jobs always welcome, but growth in manufacturing employment means more workers are securing higher-paying manufacturing jobs. While all job growth is welcome, manufacturing job growth will do the most to boost worker incomes.

Right now, the economy is on course to produce more manufacturing job growth.

There are warning signs, however, and they should not be ignored. Trade Transportation and Utilities has languished and even lost jobs over the summer. Given the surge in diesel and fuel costs, and the prospect for continued high diesel and fuel costs, are those price pressures being expressed more in job markets than in consumer price inflation? That is a possibility, and one which does not augur well for the future. War prospects have a nasty habit of shifting suddenly, and a shift in the war with Iran could very quickly end this jobs recovery. If nothing else, the jobs desert that is TTU should warn us of that much.

Will it last? Nothing lasts forever, especially jobs recoveries. This jobs recovery will eventually end. However, the current indications of continued job growth point to at least another month of jobs recovery. Wall Street certainly expects continued jobs recovery.

Given that in July the question was whether or not the jobs recession had resumed, closing out August with solid evidence that the jobs recovery is continuing is welcome news indeed!

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Conceptually, the strategy is a simple one: The US is going to exert economic pressure in every direction to make certain that no one does business with the Islamic Republic at all. The goal is to cut Iran off from all economic linkages with the wider world.

As is the case with most countries in the world, Iran needs to import certain goods. Iran needs to sell oil abroad to pay for those goods. Iran needs to be able to receive payments and make payments in hard currency. Operation Economic Outcast aims to make all of those things no longer possible for Iran.

Since then, the United States has pulled a number of financial and economic levers, all designed to starve the Islamic Republic of cash.

Meanwhile, Iran leveraged its terror proxies, particularly the Houthi rebels in Yemen, to prevent as much oil as possible from flowing through both the Strait of Hormuz and the Bab al-Mandab Strait at the entrance to the Red Sea.

What began as a war over Iran’s illegal nuclear weapons program is now a war for control over Persian Gulf oil resources. Both the US and Iran are attempting to prevent each other from benefiting from Persian Gulf oil flows.

The oilpocalypse is approaching for somebody—but for whom?

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Scott Bessent Turns The Financial Screws

Operating Economic Outcast is more than simply applying more sanctions on Iran and its trading partners. Treasury Secretary Scott Bessent has brought a number of his department’s resources to bear on Iran’s international trade. Most notably, he has leveraged the Financial Crimes Enforcement Network (FinCEN) to identify and disrupt several of the financial relationships that keep Ayatollah Mojtaba Khamenei’s regime going in Tehran.

The scope of what FinCEN can reach began to be made plain after a September 16 FinCEN Exchange session where information on Iran’s revenue streams was shared, allowing the Treasury to target and disrupt those streams.

The FinCEN Exchange program was started during the first Trump Administration in 2017, with expanded authority thanks to the Anti-Money Laundering Act of 2020.

FinCEN Exchange is a confidential, event-based, invitation-only program. In consultation with law enforcement and other stakeholders, FinCEN identifies high priority topics and hosts issue-specific events that bring relevant financial institutions, other private sector entities, and government stakeholders together to examine related risks, threats, and potential approaches for disruption. Participants share information relevant to the focus of the event, whether on emerging trends and typologies or tactical, case-specific information.

Iran’s Achilles heel is that international trade requires international finance—and the United States has considerable leverage over international financial networks. The extent of that leverage was tacitly conceded by Iranian President Masoud Pezeshkian during an interview with Fox News’ Bret Baier while in New York for the recent United Nations’ General Assembly Meeting, when he acknowledged that even Iranian funds in China were frozen.

One of the problems that we face is that our money in China is blocked. The fact that you touched upon earlier the accusations that we supply so-and-so with fundings, we can’t even get our own money out of a country to which we have supplied goods, let alone using those funds to pay someone else in another corner of the world.

Even Russia’s banks are proving not to be beyond the reach of the US Treasury. On September 14, the Treasury’s Office of Foreign Assets Control sanctioned VTB Bank Public Joint Stock Company, for helping Iranian banks evade US financial sanctions.

To say that Iran is completely isolated, economically, would be an exaggeration even now, but the US has steadily cut off the flow of hard currency into Tehran its attritional campaign to starve Iran of cash.

Houthis Raised The Stakes?

While the US Treasury was disrupting Iranian cash flows, Iran, through its Houthi terror proxies in Yemen, was attempting to disrupt tanker traffic in the Red Sea—and in particular from Saudi Arabia’s Red Sea port of Yanbu, at the western terminus of its East-West Pipeline.

At the same time Russia’s VTB Bank was being sanctioned, the Houthis were advancing on Mokha, a Yemeni city near the Bab al-Mandeb Strait, furthering that rebel group’s ambition of stopping oil traffic in and out of the Red Sea.

The Houthis also launched drone and missile attacks against Saudi Arabia’s East-West Pipeline, momentarily disrupting oil transit, successfully halting oil flows to Yanbu for a time, curtailing Saudi Arabia’s Red Sea oil shipments.

While the Houthis have managed to disrupt some oil flow through the Bab al-Mandeb, however, they have not achieved the near-total shutdown Iran accomplished back in March and April in the Strait of Hormuz. Even with Houthi mischief, oil is still flowing through the Bab al-Mandeb.

Thus far, the Houthis have added stress to global oil markets, but have not had game-changing impact.

Talking But Not Talking

While the IRGC continues its bellicose rhetoric, one persistent reality undermining their position has been various reports of attempts to restart negotiations between Iran and the United States.

On September 19, Supreme National Security Council secretary Mohsen Rezaei acknowledged that “mediated diplomacy” had been taking place, with Qatar and Pakistan acting as go-betweens with the Trump Administration. Rezaei even laid out three conditions Iran wanted before formal negotiations could resume:

Three important conditions are set here by Mohsen Rezaei during this exclusive interview. First, he is calling for a halting of war… across the region, specifically with a focus on the Yemeni front.

Second, he is talking about the frozen assets of the country and the need for these assets to be released.

And third, he is also talking about the ending of the naval blockade, which is critically important, a key point of concern for Tehran, seeing the role of this naval blockade and its impact on Iran’s oil exports in this crippling economic situation for the country.

For obvious reasons, this non-starter of a set of demands gained absolutely no traction with the Trump Administration.

Yet even with the imperious tone of Rezaei’s three “conditions”, that Iran was willing to extend even that much of an olive branch could be a signal that even the most pro-war factions within the Khamenei Regime are losing their grip.

The diplomatic overtures reached a zenith late last week, when Iran, working through Qatari and Pakistanian negotiators, offered to completely re-open the Strait of Hormuz within seven days in return for an end to hostilities and a return to the Memorandum of Understanding.

Foreign Minister Abbas Araghchi outlined the plan to reporters in New York on Thursday, according to US media. The proposal seeks to implement the conditions in the Memorandum of Understanding agreed by Washington and Tehran in June, including a halt to hostilities and the reopening of the Strait of Hormuz.

Reportedly passed to Washington via mediators earlier this week, Iran’s proposal asks the US to meet specific conditions within seven days to restart ceasefire talks and end the blockade choking the strategically important strait.

The restrictions on maritime traffic in Hormuz have become a key issue in the conflict due to the impact on oil and gas exports and the global economy.

During that same interview on Fox, Pezeshkian even said Iran would surrender its stockpile of enriched uranium.

Given Iran’s stance on preserving its nuclear weapons program and nuclear assets, that was quite an offer.

In an interesting bit of role reversal, for this latest peace overture it was President Trump who rejected it.

Well, I’m rejecting their deal. They want to make a deal where they open the Strait immediately because they’re losing so badly. You know, you don’t read that or you don’t see that in the fake news. But we’re winning tremendously.

We have total control of the Hormuz Strait. Massive amounts of oil are coming out of the Hormuz Strait. Last night, we had 29 ships come out. They want to make a deal. And I think that’s fine. I like making a deal, too. But I’m not — that deal would not be acceptable.

With President Trump’s rejection of their offer to resurrect the Memorandum of Understanding, the war with Iran remains in much the same place as it was a month ago: both sides posturing and attempting to project a measure of strength and neither side achieving either a military or diplomatic breakthrough.

Is Oil Flowing Despite Iran?

What has changed over the course of the past month has been an increasing amount of reporting indicating that Iran’s chokehold on the Strait of Hormuz is slipping.

Right before Labor Day, President Trump had been making grandiose claims that, under the aegis of the US military, tanker traffic through the Strait of Hormuz was close to pre-war levels. If true, those claims would be a significant defeat for Iran, as closing the Strait has been their only real strategic option in this war.

However, those claims have remained impossible to verify, as the IMF’s PortWatch data indicates that almost no tanker traffic is moving through the Strait.

However, recent shipping data compiled by Bloomberg suggests that Saudi Arabia has shipped an average of 5.28 million barrels per day thus far in September, with 3.4 million barrels per day of that loading at terminals in the Persian Gulf.

Building off those estimates, Saudi oil exports have made a significant recovery, indicating that Iran’s grip on the Strait is genuinely eroding.

Another independent analyst over the weekend assessed that tanker traffic through the Strait was at 92% of pre-war levels, with Saudi Arabia continuing to load crude at Yanbu on the Red Sea, despite recent Houthi attacks on their East-West pipeline.

▪️Yanbu loadings at ~2.5mbd (based on @phileepos data) still provide some relief despite the E-W pipeline challenges
▪️Saudi PG flows reached 6mbd - above 2025 avg levels, fully offsetting the reduced flows from Yanbu bypass
▪️STS volumes also increased significantly vs last week

These analyst projections are entirely unconfirmed at this point, and represent more thumbnail calculations and rationalizations for why benchmark crude prices are not higher than they are, but even if these estimates are exaggerated (which they probably are), they still point to a steady increase of oil flows through the Strait, which would be a clear setback for Iran.

What is a more definitive setback for Iran is that Qatar, the Persian Gulf’s major exporter of natural gas, has been increasing LNG loadings recently, steadily moving more natural gas through the Strait than over the summer.

At least two laden carriers have been sent outbound through the narrow strait in the last week, while at least two moved in the opposite direction to enter the Persian Gulf, according to ship-tracking data compiled by Bloomberg. One of the shipments is on its way to India’s west coast.

No signals were detected from the four vessels when they traversed Hormuz, but jamming and interference is common in the area, complicating efforts to ascertain the exact location of ships.

The Rigzone report also highlights why Portwatch isn’t registering the traffic: to avoid unwanted attention from the IRGC, between signal jamming and ships turning their transponders of (“going dark”), the normal traffic monitoring resources are not able to track ships exiting the Persian Gulf.

Separately, another Rigzone report suggests that Gulf nations are offering sizeable discounts for shipments of crude, a development that on the one hand indicates there have been more oil traders than previously acknowledged willing to take on Persian Gulf cargoes but also indicates that several of them have recently backed out of loadings in the region.

The Strait of Hormuz is not moving oil at pre-war volumes, but it is increasingly clear that the Strait is moving oil, and that volumes are increasing not decreasing.

Oil Prices Are High, But Not Moving Higher

A major reason to believe that some oil is flowing through the Strait is that oil prices themselves have not moved much higher, even after President Trump rejected Iran’s offer to resurrect the MoU. While Brent Crude is still firmly above $100/bbl, resistance has been consistently shown over the past week at the $108/bbl threshold.

Perhaps even more significantly, diesel crack spreads have been easing over the past week.

For the US, crude oil prices as well as gasoline and diesel prices moved lower over the past week.

While these are not dramatic declines, that there is any decline at all bolsters assessments that Iran’s grip on the Strait of Hormuz—and thus its sole geostrategic leverage against the United States—has already weakened considerably.

At the pump, this has meant that diesel and gasoline prices have also moved down slightly.

The drop in diesel prices also brings into focus the disparate impact of state regulations on fuel costs. Not only does California pay roughly $2.50/gal more for diesel than Texas, but the week’s decline in diesel prices has been far more pronounced in Texas than in California.

Not only does the variance in diesel prices make a compelling case against California’s onerous fuel regulations, that state regulations can have larger impact on fuel prices than Iran’s crumbling closure of the Strait of Hormuz merely adds weight to the narrative that Iran is losing its grip on the Strait.

Is Anybody Winning?

At first glance, an assessment that Iran is losing control over the Strait of Hormuz plays very easily into a claim that Iran is “losing” and the United States is “winning”.

On the longer horizon, such a claim has a certain merit. If Iran cannot prevent oil from transiting the Strait of Hormuz it has effectively lost the war. It has already lost the military confrontation, and an inability to control oil traffic through the Strait greatly weakens its geopolitical leverage in this conflict.

If Iran cannot control oil traffic through the Strait, while the US is still able to prosecute Operation Economic Outcast, Iran’s eventual collapse very quickly becomes a question of “when” and not “if”.

At the same time, US diesel prices at the pump are still well above $6.40/gal. Gasoline prices at the pump are well above $4.40/gal. These are prices that pinch. These are prices that push the Cleveland Fed’s inflation nowcast for the PCE Price Index (due out later this week) higher.

Iran may be losing the only leverage it has had in this conflict, but the world is still a long way from restoring pre-war flows of oil and refined products out of the Persian Gulf. The loss of Persian Gulf oil supply is pushing up fuel and energy prices around the world. Increased fuel prices are increased fuel costs to move goods around, and we may already be seeing some indication of that pushing core inflation up in September in the Cleveland Fed nowcast data.

Iran may be losing the only leverage it has had in this conflict, but it is doing so incrementally. The Iranian position is eroding, not collapsing. Operation Economic Outcast is likely to eventually cause the Khamenei regime to crack and collapse, but, barring some unforeseen development, that could still be weeks if not months away. Meanwhile, the attritional nature of such economic warfare means the US is still grappling with the inflationary influences of high oil and fuel prices. If Iran manages to launch another strike at Saudi Arabia’s East-West Pipeline, or if the Houthis eventually succeed in imposing a more stringent blockade of the Bab al-Mandeb, oil prices and thus diesel prices could quite easily soar upward again.

With oil prices remaining quite high, but not trending sharply higher, the oilpocalypse is still looming just ahead. It’s just not clear who it’s for: the US or Iran.

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Judging by market reactions to his latest post-FOMC press conference, Wall Street remains unimpressed. So do I. So should you.

In spite of all of the data which practically screams “stand pat”, the FOMC followed Warsh off the proverbial policy error cliff with a unanimous decision to raise the federal funds rate 25bps.

The Committee decided to raise the target range for the federal funds rate by 1/4 percentage point to 3-3/4 to 4 percent, in support of the Federal Reserve’s dual mandate. The Committee is continuing its policy of maintaining ample reserves in the banking system.

Regular readers already know that my assessment of the economic data, particularly the employment data, is that now is not the time for pushing interest rates higher.

Even though Wall Street had priced in the rate hike, between the FOMC announcement and the end of Warsh’ press conference, stocks tanked, gold tanked, and Treasury yields soared.

In a performance worthy of—or perhaps worse than?—Jerome “Too Late” Powell, “Completely Wrong” completely screwed the pooch.

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Warsh Did Not Wow Wall Street

Wall Street sentiment is easy to read. Simply follow the charts.

When Kevin Warsh opened his mouth was when stocks started heading south.

The Dow dropped 631 points. The S&P 500 dropped 34. The NASDAQ fared better, with the NASDAQ Composite breaking even.

If Warsh was aiming to tamp down fears about inflation, he failed miserably. Gold—which trends down when inflation and inflation fears trend up—also tanked during the post-FOMC presser.

Given the established behavior of gold, it’s safe to say the gold bugs got spooked by what Warsh had to say.

The 10-Year Treasury yield spiked during the press conference, moving back above 5% after having dropped to start the day.

These are not signals of Wall Street showing any confidence in Kevin Warsh.

Part of why Wall Street failed to give Warsh kudos after the rate hike is that Wall Street itself presents divergent views on interest rates and inflation. We can see that just in how long-dated Treasuries and equities have shifted since the war with Iran began.

Before Operation Epic Fury commenced, yields for the 10-Year, 20-Year, and 30-Year Treasuries had begun a downward trend to start the year.

At first glance, the reversal in Treasury yields when the war began seems reasonable. A massive increase in government spending is going to push yields higher. This is the traditional interpretation of yield movements, but it is challenged by the reality that since the third quarter of 2024, the pace at which government spending has grown has actually slowed.

Year on year, the increase in government spending during the second quarter of the year is less than at any time since the 2022 hyperinflation cycle. If slowing the rate of increase in government spending was sufficient to move Treasury yields lower during the first quarter, the surge in Treasury yields is a contrarian move.

Equities, perhaps naturally, have responded well to the war with Iran, with all three of the major indices shaking off an early year decline to soar to new highs.

Why yields are rising is attributed in the financial media to the “bond vigilantes”—investors who take a dim view of government spending growth, and deficit growth especially. There has been considerable deficit growth in the US budget, just has there has been across most major economies in the world, and the bond vigilantes are not happy.

The bond vigilante contribution to these movements is clear enough. Bond investors across the developed world have become increasingly disturbed by government budget trends. In the United States, for instance, projections of the federal deficit have increased in just the last few months. Originally, the Congressional Budget Office (CBO) set the deficit figure for fiscal 2026 at $1.9 trillion, already slightly higher than the $1.8 trillion recorded in fiscal 2025. Now the CBO says that this year’s deficit will likely be closer to $2.1 trillion, a 10.5% jump from the original estimate and an 18% jump over the actual deficit for 2025. This budget shortfall adds to an outstanding debt load that is already 125% of the nation’s gross domestic product (GDP), up from 106% before the pandemic and dramatically from 54% at the turn of the century.

Presented in this light, the bond vigilantes are seen by the same financial punditry as demanding the Federal Reserve take more assertive action on inflation.

The bond market is in charge. Bring inflation down and yields will rally. Curb government spending and yields will fall and curve might flatten. The bond market knows what it wants and currently seems to be in charge. Also, this is all coming just at the moment when everyone seemed to have forgotten about Iran. That might turn out to be a massive deal as it’s pushed inflation up and, with it, rates. So, the bond market might have trumped Trump somewhat too? Right now, it feels like the bond market is ‘The House’, more so than Warsh, Bessent and Trump.

In this view of the market, the bond vigilantes strong-armed Warsh into raising rates, even though many market economists, such as those at Goldman Sachs, see the case for a rate hike as “weak”

Before the Fed decision, some prominent economists were already on its case.

Goldman Sachs economists suggested in a note to clients this week that the case for a rate hike was “weak,” based on the state of the US economy. They argued the economy wasn’t overheating, demand wasn’t excessive, and the supply shocks fueling inflation – namely high oil and fuel prices – would correct themselves once the war ended.

It’s not that the Iran war and Ukraine’s attacks on Russian diesel refineries are part of the problem; they are the problem – all of it, Goldman’s economists said.

That inflation spiked right after Operation Epic Fury began lends a certain credibility to this perspective (yes, this means I’m agreeing with the Vampire Squid; irony abounds).

More significantly, as I have stated repeatedly, nearly all the inflation uptick we have seen comes from energy, with little contagion—and interest rates are not going to bring the market price of crude oil down.

The Fed typically “looks through” supply shocks because they’re temporary and rate hikes are ineffective at combatting them. And once they fix themselves, the Fed may find that interest rates now are too high, artificially raising borrowing costs for businesses and consumers without actually tackling inflation.

“The Fed cannot control energy prices,” said Michael Pearce, chief US economist at Oxford Economics. “The economy is solid and can withstand a few rate hikes, but the risk is higher interest rates begin to weaken the labor market.”

Warsh admitted as much during his press conference, effectively undermining his own case for the rate hike.

Given the movements of Treasury yields and equities during Warsh’ post-FOMC press briefing, Wall Street as a whole is unimpressed by someone who shoots themself in the foot voluntarily ("Too Late” Powell was a master of this, and Wall Street took him to the woodshed repeatedly during his post-FOMC pressers).

Warsh As Firmly Anti-Prosperity As Powell

One thing certainly hasn’t changed at the Federal Reserve: The brain trust at the top is still determined to choke off American prosperity and economic growth because inflation.

Warsh uses more word salad than Powell did, but he still says that quiet part out loud.

At the start of the press conference Warsh praised the “resilience” of the US economy.

As noted in the policy statement released just a short while ago, economic activity is expanding at a solid pace. While uncertainty remains elevated, owing in part to geopolitical developments, domestic spending has been resilient, productivity growth strong, and capital investment is robust. Job gains have kept pace with the workforce, and the unemployment rate has changed little.

According to Kevin Warsh, things are going good in the US economy. Naturally, that means the Fed should hike interest rates because inflation is not cooperating and moving to the arbitrary Holy Grail target of 2% year on year.

Yet for more than five years, inflation has been running above target. So our predominant focus is on the price stability side of our mandate. The plain fact is that inflation is too high and has been for too long. This summer’s inflation readings do not tell me that underlying trends have meaningfully improved. Based on the most recent CPI and PPI data, the 12-month change in total PCE prices likely was around 3.6% in August. Core PCE and CPI prices running at about 3.2% and 2.4% respectively. Too many categories are still posting increases above 3% on both a 6- and 12-month basis.

Chew on the sentence in boldface for a moment.

The empirical fact of consumer price inflation per the Core PCE Price Index is that it has been rising since October of last year, while the trend in the Core CPI data over that same period has been to decline.

Warsh is worried about a rise in core inflation per the PCEPI of 0.6pp over 10 months. Warsh is ignoring the decline in core inflation per the CPI of 0.7pp over the past 12 months.

If core price index data is the deciding factor for whether or not to raise interest rates, that the core PCEPI is deviating from the core CPI should have been a compelling argument to stand pat.

Notionally, the two indices are measuring substantially the same pricing data over the same time frame. While it is reasonable for one to have a more conservative estimate of inflation than the other, the expectation on both is that they will follow the same macro trends. Up until last summer, that was very much what happened, even throughout the 2022 hyperinflation cycle.

At the headline level, the divergence between the PCEPI and CPI data also began last summer.

The surge of energy price inflation caused the two indices to converge again, but after this past May, they diverged once more.

A more curious Federal Reserve Chairman would have made mention of the recent divergence, and a more cautious Federal Reserve Chair would have put a freeze on rate movements up or down until the forces behind that divergence revealed themselves. When two trends that shouldn’t diverge end up diverging, the reason why stands a better than even chance of being something significant.

“Completely Wrong” Warsh completely missed that part of the data.

Warsh Whiffed On Jobs

Warsh also wants people to believe all is well on the jobs front.

One basic sign of strength is the state of America’s labor markets. The jobless rate remains low at around 4.1 percent, and both job openings and weekly hours have been increasing. Unemployment claims on a four-week moving average are running at levels consistent with full employment, so the labor side of the Fed’s congressional remit is in good shape.

Let us take those claims in order.

The official U-3 unemployment rate for August is 4.1%. The real unemployment rate—the U-3 rate combined with the number of persons not in the labor force who nevertheless want a job now—is at 7.2%.

Both the real unemployment rate and the U-3 unemployment rate have been trending down since November of last year. Before that, both had been rising since April of 2023. Arguably, that is when the jobs recession from which US labor markets only recently emerged began.

As longtime readers may remember, I place no significance at all on the job openings data. A job opening has no economic significance until someone fills the job. With hirings and separations running well below job openings per the JOLTS data, I see no reason to treat the job openings data with any significance.

As for weekly hours rising, since the start of 2025 the average number of hours worked per week has risen 1.5% for goods producing jobs, 0.6% for service providing jobs, and 0.9% across all private sector jobs. For goods producing jobs, that’s an increase in hours worked of approximately 36 minutes.

In the strict technical sense, yes, the work week is increasing for most people. However, even with those increases all that does is bring the workweek almost back to the level it was at in January of 2019, before COVID and hyperinflation put the economy topsy-turvy.

Given that “Too Late” Powell’s interest rate hikes helped suppress job growth, before sacrificing jobs to the Holy Grail of 2% year on year inflation, we probably should insist on a greater gain in hours worked.

“Completely Wrong” Warsh completely missed the jobs data as well.

“Completely Wrong” Is Completely Clueless

To appreciate just how disconnected from the data Warsh really is, consider this artless response to a question on the efficacy of incremental rate hikes:

We cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store. But what we can do and will do is ensure that any change in relative prices don’t broaden out, don’t have second and third order effects in the economy. That’s what we’re tasked to do, and that’s what we will do.

Let me repeat that first sentence: “We cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store.”

We need to understand that if the objective is to lower inflation, by definition every measure taken in pursuit of that objective categorically must affect at least some individual prices. That’s what it means to lower inflation.

Moreover, as I have noted in every month’s inflation reports since the start of the war with Iran, there has been a conspicuous lack of second and third order inflation effects from energy price inflation. If that is all Warsh wants to achieve, at the moment he’s already achieved it just by doing nothing.

Hiking interest rates unquestionably threatens to squelch job growth. With the US only just beginning to see serious jobs growth after enduring a jobs recession that lasted roughly three years, how is that wise policy?

Warsh is admitting the obvious: this increase to the federal funds rate will not impact prices—which is to say it won’t halt rising crude oil prices or diesel crack spreads. The most it will achieve is combating a possible contagion effect where rising energy price inflation results in rising inflation in other parts of the price index, even though there has to be be any contagion effect registered. For that Warsh is willing to risk America’s nascent and still uncertain jobs recovery.

As the bond vigilantes proved by spiking yields during his press briefing, Warsh’ 25bps rate hike in the federal funds rate is not a persuasive move against government spending (which is going to be influenced by the market-set yields on Treasuries in any event), but as Powell proved during his post-COVID tenure, the added pressure can be quite effective in suppressing job markets.

No restraint on government spending. No appreciable influence on consumer prices. Elevated risk of weakening the job market. That is what the FOMC has accomplished with this latest rate hike, and even the bond vigilantes on Wall Street realize this.

Kevin Warsh is completely wrong about this increase to the federal funds rate. He is completely wrong about the practical severity of inflation currently. He is completely wrong about the state of US job markets. He is completely wrong about the likely impact of this rate hike on the US economy, and especially on US job markets.

That seems to be the best way to summarize Kevin Warsh: “Completely Wrong.”

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The FOMC raised the federal funds rate 25bps.

The Dow dropped 631 points.

The S&P 500 dropped 34 points.

The NASDAQ Composite broke even.

Wall Street was not impressed by “Completely Wrong.”

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The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent on a seasonally adjusted basis in August after rising 0.1 percent in July, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 3.4 percent before seasonal adjustment.

The index for gasoline rose 3.9 percent in August, accounting for over one third of the monthly all items increase. The index for energy increased 2.1 percent over the month. The shelter index rose 0.3 percent in August after rising 0.1 percent in July. The index for food increased 0.1 percent over the month, as the index for food away from home increased 0.3 percent.

The index for all items less food and energy rose 0.3 percent after increasing 0.2 percent in July. Indexes that increased over the month include communication, lodging away from home, airline fares, education, and used cars and trucks. Conversely, the index for medical care and the index for motor vehicle insurance were among the major indexes that decreased in August.

The all items index rose 3.4 percent for the 12 months ending August as it did for the 12 months ending July. The all items less food and energy index rose 2.4 percent over the year, following a 2.5-percent increase over the 12 months ending July. The energy index increased 16.3 percent for the 12 months ending August. The food index increased 2.7 percent over the last year.

There was no surprise in this, as the headline and core numbers were exactly where Wall Street expected them to be.

The Cleveland Fed’s inflation nowcast confirmed that Wall Street had a good grasp on the state of consumer price inflation, matching the inflation print almost exactly.

Energy prices rose for the predictable reasons surrounding the war with Iran, and while a supply shock is building within diesel fuel, that shock has not yet triggered either hyperinflation or stagflation within the US economy. We may yet feel one or both economic pains before long, but we are not seeing them in the data just yet.

The question on Wall Street’s mind: will the Fed raise the Federal Funds rate as many expect Kevin Warsh to do? Or will he go off script, actually look at the data, and make a reasoned decision to stand pat on interest rates.

Previously, I looked at the Employment Situation Summary and said a federal funds rate hike now would fail. The lack of core inflation in the August CPI report confirms that thesis.

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Everyone Still Expects Kevin Warsh To Raise Rates

Even ZeroHedge agrees with corporate media that the August inflation report makes a rate hike almost inevitable, viewing the September FOMC meeting as something of a “test” for Kevin Warsh.

The jawboning is over... it's sh*t or get off the pot time for Kevin (every new Fed head is tested early on by the markets).

At CNBC, they noted that Wall Street was now almost all in on a September rate hike.

Traders responded to the numbers by ramping up bets that the Federal Open Market Committee will increase its benchmark interest rate by a quarter percentage point. Odds for a hike jumped to about 90%, according to the CME Group’s FedWatch tracker of fed funds futures prices.

CME Group’s FedWatch tracker has been surging upward seemingly with each new economic report that comes out of late. With probabilities above 90%, Wall Street is convinced there will a 25bps rate hike this week.

Bloomberg sought to justify the rate hike, since the data showed inflation had not cooled at all.

The consumer price index, excluding food and energy, rose 0.3% in August from a month earlier, according to Bureau of Labor Statistics data out Friday. On an annual basis, it advanced 2.4%.

Overall consumer prices rose 0.4% from the prior month on higher energy prices, and 3.4% from a year earlier. Futures showed investors priced in a rate hike next week as a near certainty, and put a high likelihood on a second increase before the end of the year.

Only alternative outlets such as The Epoch Times pointed out how little inflation really changed.

While no one likes rising prices, and while the rise in energy prices could portend a major economic crisis about to crash over the world’s economies, the reality is that, despite the rising energy prices, the US economy is not showing signs of stagflation or hyperinflation, at least not yet. There is at present no supply shock of sufficient magnitude to warrant a countervailing interest rate shock from the Federal Reserve.

Outside Of Energy, Not That Much Inflation

Energy, naturally, is the major inflation story in the August CPI report, returning to inflation from outright deflation at 2% month on month.

The major contributors to that inflation rate were equally self-evident: Diesel (6.8% MoM) and Gasoline (3.9% MoM)

Even core inflation appears to be heating up, as the month on month number rose to 0.3% from 0.2%.

Headline inflation rose to 0.4%, reflective of rising energy price inflation.

The year on year inflation rate, however, shows core inflation to be cooling.

Core CPI has been showing a disinflation trend since August, 2025, and the August, 2026, print of 2.4% year on year did not alter that trajectory.

Yet once again, beyond energy, we are not seeing significant inflation, and we are even seeing continued disinflation.

Durable goods inflation all but disappeared in August, making the July month on month spike a decided outlier.

Nondurable goods inflation rose 0.7% month on month, a reversal from the prior two months of deflation.

However, a large portion of that nondurable goods inflation was due to energy prices rising.

The large uptick in energy price inflation carried nondurable goods with it.

Service price inflation rose incrementally in August, keeping it in the same broad range month on month it has occupied since the start of Trump’s second term of office.

Food price inflation rose marginally, from 0.08% to 0.12% month on month.

Shelter did show a small spike within the CPI data rising to .25% month on month.

However, the more forward-looking Zillow Observed Rent Index (ZORI), showed rents in continued disinflation month on month.

While inflation has not reached the Federal Reserve’s increasingly problematic “Holy Grail” figure of 2%, outside of energy prices—driven almost entirely by the disruptions from the war with Iran—the data is not showing any real sign of inflation heating up.

As the core year on year print indicates, core inflation is still getting cooler.

Energy Not Impacting Other Areas

That energy prices are not yet pulling other prices up is an important aspect of what we are seeing within consumer prices overall.

When we index the CPI subindices to January 2025, we do not see the energy increases being reflected in any other category besides non-durable goods (which will always be the case as energy goods are nondurable goods, and so there is overlap there).

We did see energy prices having more of an influence on other prices during the 2021-2022 hyperinflation cycle.

During the supply shocks of 1973-1974, inflation was more pronounced across all categories.

Inflation was also volatile across the board during the 1979 hyperinflation cycle.

While it would be a mistake to presume that all inflation stems from energy price inflation, as there were myriad influence on prices in the 1973 and 1979 as well as in 2021-2022, at present prices are showing more stability than in previous period. Durable goods is even in a period of outright deflation so far this year.

When considering the rate hike that the Federal Reserve is widely expected to announce on Wednesday, at the conclusion of the September FOMC meeting, these broad demonstrations of price stability highlight the policy error that Kevin Warsh seems to be on track to make.

A Final Word On Energy Prices

While the broad inflation data leaves little to say other than to reiterate the folly of Kevin Warsh raising the federal funds rate at this time, we should take a moment to look at energy prices in greater detail.

On Friday, West Texas Intermediate flirted with $100/bbl, and Brent Crude is firmly above that threshold.

Diesel prices are closing in on $5/gal.

Gasoline prices are well above $3/gal.

Since mid-summer, market energy prices have moved in one direction—sharply higher.

The EIA weekly fuel price averages have been following suit, and as of last week the reported average price for diesel was just below $6/gal.

As of yesterday, AAA reported the average price for diesel at $6.2/gal, and the average price for regular gasoline at $4.3/gal.

Per the AAA data, gas prices at the pump have risen nearly $0.25/gal in just the past month, while diesel prices have risen $0.80/gal over the same period.

On the year diesel is up some 70%, and gasoline is up some 48%.

These are steep price increases. While we can look at the broad inflation numbers and say “outside of energy, not a lot of inflation,” we should not overlook the reality that inside energy, there is quite a lot of inflation. This is inflation consumers are feeling every time they fill up their vehicles. This is an added cost for every Uber and Lyft driver, and for every grocery delivery person.

These prices are likely to only get worse over the near term, particularly diesel prices.

The crack spread for diesel is at an all-time high, finishing out the trading day Friday flirting with $110/bbl.

The crack spread on diesel is priced higher than the underlying contract on crude oil.

Gasoline crack spreads have moderated somewhat, but are still considerably higher than they were pre-war.

These are not good price trends. These are the sort of price trends that will result in stagflation in the very near future if they continue.

The broad Consumer Price Index and PCE Price Index data at present do not show the US economy to be experiencing stagflation. When we look at the Real Misery Index (inflation plus the real year on year unemployment rate), we see the index has actually moderated over the past few months.

Compared to the Misery Index across the 1970s, the US economy is still on the low end of the range.

The more energy prices rise—the more diesel and gas prices push energy price inflation higher—the higher the Misery Index will move as well.

We are not experiencing stagflation now, but if energy price trends continue as they are, we almost certainly will, and sooner rather than later.

Interest Rate Hikes Still Not The Solution

August was a good month for jobs in America, and it has been the largely positive jobs reports this year that are helping to keep the Misery Index from moving higher.

Energy prices are already a major concern for most people, and are on track to become an even bigger concern. However, interest rate hikes are not going to make oil flow through the Strait of Hormuz, or move the Houthis off the Bab El-Mandeb. All interest rate hikes can do—and it would require a far larger increase than 25bps to accomplish anything—is suppress consumption and force demand (including energy demand) down to levels consistent with market equilibrium given the current constrained supply situation.

However, suppressing consumption to push energy demand lower will also push all demand lower. That’s how interest rate hikes work. That’s how interest rate hikes are designed to work.

Are lower energy prices worth a recession, when other pricing categories are not on course for hyperinflation?

That is what Kevin Warsh and the FOMC will be risking should they do as Wall Street expects and raise the federal funds rate on Wednesday.

A 25bps rate hike in the federal funds rate will not push down energy prices, and will not slow their rise from ongoing disruptions in the Persian Gulf.

A 25bps rate hike may very well curtail job growth. Depending on how much hiring pressure really exists in the economy, a 25bps rate hike may bend overall hiring back towards a new jobs recession—not immediately, but conceivably by the beginning of 2027.

Outside of energy prices, the August Consumer Price Index Summary was a pretty good inflation report. Given where energy prices are, and where they are going, even the energy price portion of the CPI print could easily have been worse. Given current energy trends in the market, the energy price portion of the CPI print is about to get worse, maybe even a lot worse.

Kevin Warsh needs to do the right thing and not misread the August Consumer Price Index Summary. Like the Employment Situation Summary and the Producer Price Index Summary, the CPI print is still an argument for standing pat on interest rates, not raising them.

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The Producer Price Index for final demand moved up 0.4 percent in August, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices rose 0.1 percent in July and decreased 0.1 percent in June. (See table A.) On an unadjusted basis, the index for final demand increased 5.4 percent for the 12 months ended in August.

In August, the index for final demand goods advanced 1.1 percent, and prices for final demand services increased 0.1 percent.

The index for final demand less foods, energy, and trade services rose 0.3 percent in August after moving up 0.4 percent in July. For the 12 months ended in August, prices for final demand less foods, energy, and trade services advanced 4.7 percent.

At 5.4% year on year, headline factory gate inflation was just above Wall Street’s consensus estimate, as was core inflation at 4.7%.

The predictability extended even to the narratives in the financial media. Because the headline inflation metric rose, the Producer Price Index Summary is another reason for the Fed to raise the federal funds rate, because inflation and reasons and whatever.

Just as predictably, the data does not support a rate hike. If anything, the August PPI print is a reason for the Fed to stand pat on the federal funds rate.

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Media All Reach Same Conclusion: Fed Will Hike

The lack of surprises in the PPI data meant that both corporate and alternative media outlets ended up reporting largely the same thing: energy price inflation was up, making goods prices higher, and therefore the Fed is more likely to raise the federal funds rate.

That was the explicit conclusion of CNN, for example:

Thursday’s report could strengthen the case for the Federal Reserve to raise interest rates at its policy meeting next week.

ZeroHedge’s analysis reached the same conclusion.

As CNBC noted, Wall Street, despite anticipating the PPI print, still reacted badly.

Excluding food and energy, core PPI accelerated by 0.2%, against the forecast for a 0.3% increase. Core less trade services, another volatile category, was up 0.3%.

Stock market futures were negative following the report, the release of which coincided with U.S. crude oil prices topping $100 a barrel. Treasury yields moved sharply higher.

Associated Press had perhaps the best coverage, acknowledging that there factors beyond energy prices and the war with Iran.

Inflation has shown some signs of easing in recent months but is still high, frustrating consumers who are struggling with more expensive gas, groceries, clothing and other essentials. U.S. oil prices topped $100 a barrel Thursday on renewed fighting in the Middle East, while President Donald Trump has intensified a trade war with Canada, a sign tariffs still could push up costs. Rising prices pose a political problem for the Trump administration and Republicans running in the midterm elections.

The reality is that Wall Street is convinced the Federal Open Market Committee will raise the federal funds rate 25bps next week, with current probabilities at 71%.

Wall Street is not enthusiastic about the coming rate hike. The publication of the PPI data caused Treasury yields to spike, and the 10-Year Treasury closed out the day closing in on 5% yield.

Equities, meanwhile, had another down day.

Wall Street has become so habituated to following the Fed’s lead on interest rates, that very little thought was given to whether the PPI data really supports a rate hike—which it does not.

Energy Surged, Everything Else Didn’t

While headline factory gate inflation of 5.4% dominated the media reporting, core inflation is still sporting a disinflation trend. Even at 4.7%, core inflation is moving steadily lower from its April peak.

Core inflation’s downward trend was more apparent month on month.

The difference between the headline and core inflation rates was easily seen as energy-related.

Energy was alone in showing a surge, however.

Food prices reverted back to inflation in August, after printing deflation in July.

Services continued their disinflation trend, with the lowest month on month print since June of last year.

Goods prices apparently surged, but only because energy goods are included.

Energy prices have been the culprit behind almost all of the increase in goods prices since March. Without energy prices, goods prices are flirting with systemic deflation.

But for energy prices, there would be little or no producer price inflation at the final demand level.

Intermediate Demand Signals Inflation Is Coming

With the PPI serving as a common leading indicator for consumer price inflation, the lack of clear inflation for final demand prices suggests that even next month, inflation’s rise will be limited to energy prices.

Intermediate demand, however, surged, suggesting that later in the fall we will see more factory gate inflation.

With the greatest increase coming in Stage 1 Intermediate Demand, the inflation pulse implied by rising intermediate demand prices is more likely to arrive in the CPI print in October or possibly even November.

Energy is a driving factor even here, however, with processed fuels pushing intermediate demand prices higher while unprocessed fuels are pulling intermediate demand prices lower.

Fuel prices were the driving force behind transportation and warehousing inflation during August. Trade itself printed deflation, and that left services less trade, transportation, and warehousing virtually unchanged on the month.

Energy price inflation is here, and is likely to get worse.

The Producer Price Index Summary is signalling that only energy price inflation is inbound at the moment.

Energy Prices Have Already Gotten Worse.

There is no crystal ball needed to know that energy price inflation will get worse. Fuel prices—especially diesel prices—are still rising.

With diesel crack spreads (the difference between the futures price for diesel and the futures price for feedstock crude oil) pushing well above $100/bbl, there is no reason to expect diesel prices not to rise further.

The rise in diesel crack spreads underscores the significance of the rise in diesel prices, because the crack spread is reaching record highs even with benchmark crude topping $100/bbl for Brent.

As I have noted many times previously, there is no denying that energy prices are moving up almost across the board, with the notable exception being US natural gas.

US natural gas prices have dropped by nearly 25% since the start of the year.

No Broad Based Inflation—Yet

Given the steady rise of energy prices over the summer, it is remarkable that we have not seen more energy price inflation, both in the PPI and in the CPI, than we have. At least some of August’s energy price inflation qualifies as “long overdue.” Looking directly at market prices for diesel, for gasoline, and for crude, the data supports a clear expectation for far more energy price inflation than we have seen.

However, even with energy price inflation starting to “catch up” to market prices, we are not seeing energy prices push other goods prices higher. Producer prices for trade are in outright deflation.

But for energy prices, there would be very little increase in inflation across the entire board.

This is an important qualification of the PPI data, as it is the crux of why now is not the time to raise the federal funds rate.

As I have discussed previously, rate hikes corral inflation by constraining consumption and employment. By putting the brakes on the economy as a whole, interest rate increases lower overall demand—not just for energy-related goods and services but for everything.

That is how all interest rate rises operate—discourage consumption and discourage job formation. As Volcker did in 1979, push interest rates high enough, hold them there long enough, and the end result will be a recession.

Without a clear hyperinflation cycle taking place, and without clear evidence of broader inflation, impeding consumption and employment is monetary policy overkill. With core inflation printing at 2.4% year on year, reducing consumption and softening employment simply cannot be justified.

The oilpocalypse is real. Energy price inflation is real. Yet the impact of energy price inflation has so far been minor, and the Producer Price Index suggests that will continue for at least a little while longer.

We are not yet seeing the “worst case” in energy prices. The Federal Reserve will be making a major mistake to act as if we are.

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With the peculiar “Through The Looking Glass” sort of reasoning that passes for expertise at the Federal Reserve, because jobs were created, interest rates must be raised to stop jobs from being created, because inflation.

As we saw during the 2022 hyperinflation cycle, former Federal Reserve Chairman Jerome “Too Late” Powell and his minions among the Fed Governors were quite explicit about their reasoning. Their cure for inflation is to make jobs too expensive to create, and consumption too expensive to consume.

It “worked” for Paul Volcker, so it must work for all central bankers in all circumstances for all time.

When we look at the hard data, both for Paul Volcker’s time and for the present circumstance, we find reality has a different take both on Volcker’s rate hike “shock therapy” of 1979-1982, and on the Fed’s rate hikes in 2022-2023.

That take, if Kevin Warsh can be bothered to do some of his own research for a change, also says raising the federal funds rate now is the wrong move. There is no need and it will do no good.

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Rate Hike Is Assumed

As I noted the other day, Wall Street is convinced that the Federal Reserve will raise the federal funds rate 25bps at the September meeting of the Federal Open Market Committee.

As the Associated Press reported, the expectation of a rate hike pushed equities down on the day Friday.

The S&P 500 fell 0.4%, though it managed to eke out a modest gain for the week. The Dow Jones Industrial Average fell 0.5%, and the Nasdaq composite gave back 0.3%.

Wall Street expects the Federal Reserve to raise interest rates before the year ends in an effort to cool inflation, which has been running hot due to rising oil prices amid the U.S. war with Iran and remains well above 3%. The Fed has a stated goal of cooling inflation to a target of 2%.

The expectation of a rate hike was also the reason given for Treasury yields rising on the day, according to CNN.

The two-year Treasury yield jumped after the data release, reflecting increased expectations that the Federal Reserve has room to raise interest rates at its policy meeting later this month. The 10-year yield moved slightly higher.

The reasoning: more jobs mean more reasons to raise interest rates. Morgan Stanley economist Ellen Zentner gave that logic explicitly to CNBC.

“An upside surprise in payrolls will likely ramp up concerns about a rate hike, but that outcome is in the hands of next week’s inflation numbers,” said Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management. “If those come in cooler than expected, the Fed will likely feel comfortable discounting potentially inflationary signals coming out of the labor market.”

The jobs report pushed the probability of a 25bps rate hike to 60% for September.

Part of this belief stems from Wall Street’s assessment that the Federal Reserve is going to push rates even higher in 2027. By this time next year, Wall Street’s expectation is for an additional 25bps rate hike.

This is part and parcel of Kevin Warsh’s reticence towards forward guidance, Wall Street’s programmed expectation of what the Federal Reserve is going to do twelve months down the road—well beyond what any prognostication of economic conditions can rationally sustain.

This is also why Kevin Warsh doubling down on the 2% inflation “Holy Grail” number at Jackson Hole was a bad idea. Publicly placing that marker down was Ben Bernanke’s bright idea (apparently he was looking for another midwit mistake after causing the Great Financial Crisis in 2008 with his reckless interest rate hikes for no reason), but it was anathema to his predecessor Alan Greenspan, and this is the primary reason why.

How Did Rate Hikes “Cure” Inflation For Paul Volcker?

The reflex response of central banks to inflation is to raise interest rates, and has been since Paul Volcker did it in 1979 to break America’s “stagflation” crisis.

The prevailing narrative is that raising interest rates squelches inflation. However, what is overlooked by that narrative is the mechanism by which higher interest rates constrain consumer price inflation: as multiple Fed officials said during the 2022 hyperinflation cycle, interest rates work by reducing hiring and spending.

Jay Powell was blunt about it at Jackson Hole in 2022.

Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.

Inflation means the economy is broken, and so long as there is inflation labor markets will suffer….but to reduce inflation and restore price stability requires breaking the economy and making the labor markets suffer.

Yeah, that makes sense…not.

Squelching consumption, however, was exactly what Volcker achieved with his interest rate hikes in 1979, as we can see when we look at real personal consumption expenditures from 1977 through 1984, using the PCE Price Index and the Consumer Price Index as deflators.

By raising interest rates and keeping interest rates elevated through 1982, Volcker succeeded in putting consumption in stasis. In real terms, there was no meaningful increase in real consumption until around July of 1982, by which time core inflation had dropped to “only” 7.5%.

Put simply, Paul Volcker put the American consumer through a deflationary wringer to get inflation under control.

Technically it worked…but it was the American consumer (which is to say the American worker) who paid the cost of Volcker’s shock therapy.

Why did it work? By slowing down consumption for a time, Volcker was able to achieve sustainable symmetry between the US money supply (M1) and the velocity of that money supply, with inflation moving comfortably between the two.

The significance of the oscillations of money supply and money velocity is that they are one side of the fundamental equation in the Quantity of Money Theory1.

When money supply changes and money velocity changes move in cycles which are the inverse of each other, much of the monetary pressure which leads to inflation is mathematically negated. This symmetry was not well established prior to Volcker’s interest rate hikes, and inflation frequently moved outside of the bands established by money supply changes and money velocity changes.

Why Did Volcker Raise Rates, And Does That Logic Apply Now?

Why did Paul Volcker believe this approach was necessary? In large part because the US economy was grappling with its second oil supply shock of the decade, as demonstrated by energy price inflation rising faster than energy expenditures.

Energy price inflation remained problematic until the oil glut of the mid-80s.

The trigger for the stagflation crisis of the late ‘70s was a sudden and severe oil supply shock. Simply put, the supply of oil available to the United States suddenly dropped after the Islamic Revolution in Iran and the toppling of the Shah.

When energy price inflation accelerated in 1979, it touched off a spiral which pushed consumer price inflation to new heights, creating a severe pricing squeeze that was felt throughout the US economy.

Is that what is happening now?

As I have assessed previously, there has indeed been a global oil supply shock as a result of Operation Epic Fury and the US war with Iran.

However, the inflationary impact of that supply shock has been muted thus far. If we look at real energy consumption vs energy price inflation, indexed to 2021, energy price inflation remains below energy consumption.

While energy price inflation has been highly volatile since 2021, it’s ultimate impact on the overall PCE Price Index has been fairly muted, and it has had minimal distortion on energy consumption expenditures, as we can see from the year on year change for each.

We should also note that energy price inflation’s overall impact on consumer price inflation in the late 1970s was also less than we might surmise from the oil supply shock. The extent to which Volcker’s shock therapy was even necessary as anything more than a tool of political convenience is debatable. Even without the rate hikes, it is quite possible inflation would have settled down on its own without the Fed intervening.

As we can see just by looking at the headline and core PCEPI year on year inflation rate since 1977, we are not facing the stagflationary crisis the US was in 1979.

More importantly, ever since Volcker “reset” the relationship between money, interest rates, and inflation, manipulating the federal funds rate has been steadily less and less impactful on consumer price inflation.

Interest rate fluctuations have had smaller impact on consumer price inflation than during Volcker’s chairmanship of the Fed. After the Great Financial Crisis, when Ben Bernanke dropped the federal funds rate to near zero, inflation remained largely steady.

The dubious wisdom of manipulating interest rates during the 2022 hyperinflation cycle is made plain when we consider that Powell’s rate hikes were nowhere near the same magnitude as Volcker’s and showed nowhere near the proximate impact on consumer price inflation.

What we do see when we look at the federal funds rate vs job growth in the US, looking at the data from the Alan Greenspan era through the start of the Jay Powell era, is that raising interest rates tends to suppress job growth.

We can see that Powell’s rate hikes, regardless of their problematic impact on inflation, have suppressed job growth in this country.

How interest rates which demonstrably suppress job growth are supposed to fulfill the Federal Reserve’s dual mandate, which includes pursuing full employment2, is something neither Jay Powell nor Kevin Warsh had bothered to explain.

One final nail in the “let’s raise interest rate” argument’s coffin: According to the current Cleveland Fed inflation nowcast, the inflation impact of the August Employment Situation Summary report was precisely zero.

The Federal Reserve is literally on the verge of responding to a problem that arguably does not exist. Job growth in the US is not pushing up prices, and hasn’t been.

Maybe after a year of job recovery there will be inflationary effects, but not after a few months of job recovery. Not when the jobs recession lasted nearly three years.

A Rate Hike Will Not Impact Inflation, Will Impact Job Growth

What a thorough review of the data demonstrates—and what Kevin Warsh and the Federal Reserve should understand (but do not)—is that a 25bps increase to the federal funds rate is not going to move the needle much on inflation. That 25bps increase is going to act as a further drag on job growth in this country.

The US economy only recently emerged from an extended jobs recession. Before the August Employment Situation Summary report came out, the data indicated the US is flirting with a return to jobs recession.

If the August numbers are subject to significant downward revisions we may yet find ourselves returning to jobs recession.

With a recovery still very much in a fragile early stage—assuming is still ongoing—a jobs-suppressing federal funds rate hike in September would only end that recovery. It would not push consumer price inflation down towards the “Holy Grail” of 2% year on year.

Will the Fed stand pat on the federal funds rate? Wall Street does not believe they will, and I am inclined to believe Wall Street has the sense of where the Fed is at on interest rates. Wall Street is expecting a 25bps rate hike this month, and I suspect they will be proven correct.

The Fed is not likely to stand pat on the federal funds rate, but the fed absolutely should stand pat on the federal funds rate. What the FOMC wants to achieve with a rate hike it will not achieve—it cannot achieve.

Kevin Warsh is not Paul Volcker. The 2020s are not the 1970s. The circumstances which made Volcker’s shock therapy work in 1979 did not apply in the 2022 hyperinflation cycle and they do not apply now. Without those circumstances, interest rate hikes will never have the desired impact on the US economy.

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Total nonfarm payroll employment increased by 162,000 in August, and the unemployment rate was unchanged at 4.1 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in food services and drinking places and in local government education. The information industry lost jobs.

Private sector employment gained 127,000 jobs, according to the report, which is nearly triple what Wall Street projected the night before the jobs report came out.

The truism is that if something sounds too good to be true, it probably isn’t.

How much skepticism should we then apply towards the August jobs numbers from the BLS? Given their track record for massive downward revisions, quite a bit. 162,000 jobs is definitely in the “sounds too good to be true.”

Yet when we look into the details behind the headline figure, the data holds up. 162,000 jobs is a tremendous surge in jobs, and well above what the ADP report indicated would be the headline number, but the internals of the ESS are consistent with major job growth.

The Employment Situation Summary sounds to good to be true…but does the data show that it isn’t?

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More Lou Costello Labor Math?

As long-time readers are aware, when the Bureau of Labor Statistics puts out numbers that just don’t add up, I have taken to calling that “Lou Costello Labor Math”, in homage to the vaudevillian’s classic sketch were “Thirteen goes into twenty-eight seven times.” That bit of absurdity is often the only way to make sense of the data dumpster fire the BLS frequently puts out on jobs.

On the surface, the August jobs report practically screams Lou Costello Labor Math. That was certainly my initial take when the report was first released. The August ADP report was a clunker, and ADP is theoretically measuring the same data; there would be some variance but not that much variance, surely.

Additionally, the July Job Openings and Labor Turnover Summary report did not provide any indication of a sudden surge in employment for August. Quite the opposite, the composition of the JOLTS data suggested August might see considerable downward revisions—the result of overstated estimates, the hallmark of Lou Costello Labor Math.

The JOLTS data also suggests we may have significant revisions in the upcoming August Employment Situation Summary. A sizable portion of job sectors have shown less job growth in last three months’ JOLTS reports than in the corresponding Employment Situation Summary.

Where job sector growth is overstated in one month, we can expect corrections and downgrades over the next few months.

The August ESS had substantial revisions…upward.

The change in total nonfarm payroll employment for June was revised up by 11,000, from +20,000 to +31,000, and the change for July was revised up by 44,000, from -23,000 to +21,000. With these revisions, employment in June and July combined is 55,000 higher than previously reported.

July went from net job loss to job growth.

Much of that revision came in the private sector, although June did see some further reduction in private sector jobs.

These were not the revisions the July JOLTS report indicated we could expect for August. With the August revisions, the total adjustments to non-farm job growth stand at -56,000 on the year.

One quick survey tool when reviewing the data is to compare the indexed trends among the ADP report, the Employment Situation Summary’s All Employees data from the Current Employment Statistics survey, and the Employment Level from the Current Population Survey.

For much of the year, the Employment Level has deviated substantially from the rest of the data.

The August Employment Level moved decisively upward. The payroll increase of 162,000 jobs is contextualized by an Employment Level increase of 569,000 workers. The two BLS surveys within the ESS agree on this much: August saw significant increase in employment.

Are we seeing Lou Costello Labor Math run amok? The constant caveat is always “maybe”. When the data sets are given a final revision at year-end we could conceivable see significant downward revisions across the entire year.

However, within the data that we have, the usual indicators of bad data are not evident. America may not have seen 162,000 jobs created in August, but there appears to have been significant job growth well above Wall Street estimates.

Media Did Not Question The Numbers, But Wall Street Hated Them

Unsurprisingly, corporate media did not flinch when the ESS published their surprise figures. CNBC took the data in stride, blithely accepting once again what the BLS put out.

“Net, net, the labor market is alive and well and generating thousands of new jobs to help keep economic growth squarely in the plus column,” said Chris Rupkey, chief economist at Fwdbonds.

The report was consistent with what Federal Reserve officials have called a stable labor market, and likely turns the central bank’s focus to next week’s reports on consumer and producer prices as the final determinant heading into the interest rate decision in less than two weeks.

CNN and the Associated Press were similarly passive in accepting the high jobs print, with AP highlighting Wall Street’s negative reaction to the numbers.

The surprise increase in hiring could give the Federal Reserve leeway to raise its benchmark short-term interest rate to fight inflation when central bank policymakers meet later this month.

The S&P 500 fell 0.5% in morning trading. The Dow Jones Industrial Average was down 378 points, or 0.7%, as of 11:08 a.m. Eastern time. The Nasdaq composite fell 0.4%.

All the major indices finished the day down sharply, each one heading south almost immediately after the opening bell.

Wall Street views the hot jobs print as confirmation that the Federal Reserve will be raising the federal funds rate 25bps at its upcoming September meeting, with the probability of the rate hike standing just below 60%.

Treasury yields certainly moved as if to anticipate the rate hike, with the positive jobs print pushing the 10-Year Treasury yield briefly above 4.8%

For its part, the White House took the expected victory lap over the numbers.

America added 162,000 jobs in August — triple economists’ expectations. The private sector has now created over one million jobs under President Trump, whose reindustrialization agenda continues to drive manufacturing and factory construction job growth. America is in the middle of a historic investment boom, and the August jobs report is the latest data point showing how Americans are benefitting from the Trump administration’s pro-growth policies. The best is yet to come with even more job, wage, and economic growth in store for everyday Americans.

The impact of the jobs print on the Fed’s upcoming interest rate decision was conveniently (but perhaps understandably) overlooked by the White House.

We are seeing the same “good news is bad news” response from Wall Street that was quite common during Jay Powell’s Fed Chairmanship. If Kevin Warsh intended to establish a new dynamic between the Federal Reserve and Wall Street, he hasn’t—one more failure to mark the ignoble start to his term.

How Good Is The Data?

Drilling into the report’s internals, the results are the same: the data is positive.

Only Finance and Information reported job loss during the month, with all other sectors reporting job gains.

Construction had its second consecutive strong month at 22,000 jobs added.

Manufacturing enjoyed a third consecutive month of strong growth at 16,000 jobs added.

Manufacturing has become one of the brighter stories in the Employment Situation narrative for 2026, having finally reversed a decline that began in mid-2023.

The service sectors with the largest gains were, predictably, Leisure (62,000 jobs) and Healthcare (29,000 jobs).

The remaining sectors with gains—Mining (3,000 jobs), Trade Transportation and Utilities (16,000 jobs), and Professional Services (10,000 jobs)—were less pronounced, but still net positive on the month.

While not a complete across the board increase in jobs, with all but two sectors reporting positive job growth the August ESS is a relatively balanced jobs print.

Unemployment Declined

Perhaps even more encouraging than the job growth numbers is the decline in unemployment, both at the official level and at the “real” level (with those not in the labor force but who want a job now included).

The real unemployment rate declined marginally, to 7.2%. The official rate remained steady at 4.1%

In both official and real terms, joblessness has been trending down since the beginning of the year, marking a true trend reversal from the rising jobless numbers we have seen since 2023.

Even the number of persons not in the labor force overall declined in August.

The uptick in the Employment Level tells us these were workers moving back into the labor force, and not a total reduction in the civilian population.

This growth was sufficient to push the Employment-Population Ratio up, something it has not done consistently since 2023.

Will we see more improvements like this? That is always the hope. We shall have to wait for the future data to arrive to know the answer.

Wages Improved Overall

In another encouraging sign from the ESS, there was broad-based wage growth as well.

Only Mining saw a significant drop in weekly earning in August, with the remaining sectors reporting at least some wage growth.

Weekly earnings growth is one of the data points the Fed consistently overlooks when doing its ritual pearl-clutching over inflation. During the Trump 2.0 era, wage growth has consistently been above the inflation rate.

This chart alone should be reason enough for the FOMC to leave interest rates alone. Inflation is not a problem when wage growth exceeds it—if prices go up 10% while wages go up 20% real wages are still up 10%. Since President Trump took office, wages are beating inflation. If inflation rises significantly and threatens to overtake wages, as nearly happened between February and May, a rationale begins to emerge for higher interest rates. With that not happening, there simply is no reason to tinker with the federal funds rate at this time.

Because wage growth has been strong under President Trump, even with inflation above the Fed’s “Holy Grail” rate of 2% year on year, weekly earnings in this country have made progress in fully recovering from the 2022 hyperinflation cycle.

Goods producing wages have already recovered for the most part (even with the price shocks from the war with Iran), and Service Providing jobs are getting closer.

An interest rate hike now would threaten future wage growth.

Do Other Data Sets Confirm The ESS?

The major challenge in accepting the August Employment Situation Summary at face value is that it is so much at odds with the ADP National Employment Report—the two reports vary by some 90,000 jobs.

The July JOLTS report also did not give any signals that a major employment surge was in the offing. We will have to wait for the August JOLTS report to see if we get confirmation of the BLS data.

As we noted with the ADP jobs data, the PMI data sets paint a relatively rosy picture of the employment situation for the US economy.

The S&P Global Manufacturing PMI has been consistently in expansion for a year.

The Institute for Supply Management Manufacturing PMI has printed expansion since the start of the year.

While the ISM Manufacturing Employment index has been slow to move into expansion, it finally did so in July, and remained in expansion for August at 51.2.

The ISM Services PMI released last Thursday showed the expansion widening to 55.4

While the ISM Services Employment index remained in contraction for August, it did show a slowing down of that contraction at 47.8.

The S&P Global Services PMI improved to 56.8, its best showing of the Trump 2.0 era.

The PMI data was notable for being a contrarian signal for the ADP report. Aside from the Services Employment metric, both the ISM and S&P Global PMI metrics are confirming signals for the Employment Situation Summary.

By all accounts, there was genuine and significant job growth in the US in August. For whatever reason, ADP appears to have missed most of it.

Definitely Not A Job Recession

At a minimum, the August Employment Situation Summary pushes back at least for the current month fears of a return to job recession in this country. Unless between September and October we see downward private sector job revisions totaling 100,000, we are looking at a good job report.

There was job growth. There was reduction in both the real unemployment level and the real unemployment rate. There was a significant reduction among those persons not in the labor force at all.

There was wage growth.

Within the report itself, there is no denying that the Employment Situation Summary shows US labor markets “firing on all cylinders”.

While the ADP report calls into question the Employment Situation Summary, the PMI metrics largely confirm the report.

Wall Street certainly believes the report, and believes the Fed will act on the August jobs report by raising interest rates.

While we always have to pay attention to the job revisions that come out with each report, as the BLS has been quite notorious in the past for magically walking back stellar job growth numbers, unless there is a dramatic reduction in September or October, the August ESS report is telling us that US job markets are not in the shaky condition the JOLTS report has been showing for the past couple of months.

Is some of the labor increase seasonal in nature? That is a possibility, especially for the 62,000 Leisure jobs, as many positions have a seasonal aspect to them.

What should we make of the data if the August JOLTS report does not show similar increases in Net Hiring? On the surface, this strongly suggests a problem with the data, for if there were 162,000 new jobs in August, we should expect to see net hiring of 162,000. When the March and April jobs reports were printing red-hot job growth, we were seeing similar figures from the JOLTS reports as well.

The August JOLTS data is due out on September 29th. Then we will know how realistic the August ESS data is.

In a couple of weeks, we will have the Capacity Utilization and Industrial Production figures for August from the Federal Reserve. If we see indications there of significant industrial expansion, that will give further credibility to the jobs data. If there is a drop in industrial production, we will have reason to question the jobs data.

While all jobs data must be taken with a grain of salt, at present the August Employment Situation Summary cannot be easily dismissed as a dumpster fire of Lou Costello Labor Math. We have only a single report refuting the data and numerous other indicators confirming it.

The US economy very likely did see significant job growth in August. While the Fed will likely misuse that result to raise the federal funds rate, for today we have good news within American labor markets.

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How bad were the job numbers? Bad enough that even ADP’s Chief Economist Nela Richardson couldn’t come up with a nifty quote for the news release, only disjointed word salad.

Pay can tell us a lot about today’s choppy hiring. To understand hiring patterns, you have to look deeply into where pay growth is accelerating, where it’s slowing, and for whom. Once-predictable wage growth has been overtaken by the complexities of demographic change, persistent inflation, and AI’s effects on jobs.

In other words, ADP looked at job growth down at 38,000 jobs and had no good explanation.

Just last night, readers will recall, Wall Street was anticipating job growth of 48,000 jobs.

The ADP report missed that projection by 10,000 jobs. Against 38,000 jobs total, that’s a pretty big miss.

The internal numbers were even uglier. Only three sectors had better job growth in August than in July, while five sectors showed job loss.

In the spring elevated jobs numbers naturally opened the door to the question of whether or not a jobs recovery was underway. Today’s reduced jobs numbers naturally opens the door to the question of whether or not the economy is falling back into a jobs recession.

The ADP jobs data does not quite answer that question with “yes”, but it definitely does not answer that question with “no”.

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Corporate Media Subdued

One indication of the level of suckage in the jobs report is the muted response from corporate media, with both Fox Business opting to say little beyond the bare numbers of the report itself.

Which industries are hiring the most workers, according to the ADP report?

Education and health services added 45,000 positions, leading job creation in August. Leisure and hospitality added 16,000, and financial activities and other services each gained 6,000.

On the negative side, manufacturing lost 17,000 jobs and professional and business services lost 16,000. Natural resources and mining, and trade, transportation each lost 5,000, while information lost 4,000 positions in the month.

and CNBC noting that labor markets have slowed bigly.

Though job creation held positive, August was the smallest gain since January and reflective of a broader slowdown in the labor market. Moreover, most of the jobs came from three sectors, with multiple others showing declines.

August was the third straight month the ADP National Employment Report posted a smaller job growth figure than the last.

Robust and healthy labor markets should show increasing job numbers, such as what we saw in March through May.

Instead, most job sectors posted job losses in August.

In June, all but one sector posted job gains on the ADP report. Two months later five sectors are posting job losses.

That’s not a trend which speaks to job recovery. That’s a trend which suggests a return to a jobs recession.

Manufacturing Got Hammered

The most disappointing reversal in August was in Manufacturing, which posted a job loss number very close to that from a year ago, shedding 17,000 jobs.

Almost as bad was the Professional Services sector, which shed 16,000 jobs.

Rounding out the roster of job losing sectors was Information, Trade Transportation & Utilities, and Mining.

Finance was in the middle ground, showing cooler job growth than in July but remaining positive.

Continuing with a long-term norm, Healthcare once again posted the best job growth numbers, at 45,000.

Coming in second was Construction, which improved to 12,000 jobs.

Leisure returned to job growth in August, posting the strongest job growth all year at 16,000 jobs.

Overall, service producing jobs improved from July marginally, while goods producing jobs declined significantly.

These are not labor trends which America needs if President Trump’s Agenda 47 goal of making the United States a manufacturing superpower is to be fully realized.

Again…PMIs?

As with the July JOLTS report, the dour economic outlook implied by the ADP jobs report stands in sharp contrast with the upbeat signals from the PMI metrics, particularly for manufacturing.

The S&P Global Manufacturing PMI has been consistently in expansion for a year.

The Institute for Supply Management Manufacturing PMI has printed expansion since the start of the year.

While the ISM Manufacturing Employment index has been slow to move into expansion, it finally did so in July, and remained in expansion for August at 51.2.

The ISM Services PMI data has not yet been released for August as of this writing, but the S&P Global Services PMI improved to 56.8, its best showing of the Trump 2.0 era.

As bad as the ADP jobs numbers are, other indicators are signalling a fair amount of strength and energy in the US economy.

Interest Rates And Oilpocalypse

Despite the presence of positive signals for the US economy, however, there is no escaping the negative backdrop established by the on-again, off-again, now on-again war with Iran, which is continuing to push oil prices high and diesel prices higher, with the spread between oil futures and diesel futures widening.

With the November contract on Brent Crude having moved above $95/bbl, diesel prices are shaping up to be the nexus of a slow-motion oilpocalypse, where fuel prices slowly smother the world’s economies.

The surge in diesel futures translates into a price at the pump of $5.45 on average across the US, close to the peak prices from April and May, right after Iran illegally closed the Strait of Hormuz.

Rising energy and fuel costs, if they persist, can only act as a drag on the economy, holding growth below potential. That problem is compounded by the continued rise in Treasury yields since the war with Iran began.

Mortgage rates have followed Treasury yields upward.

One does not need a PhD in economics to see that rising interest rates and rising fuel costs are obstacles an economy needs to overcome. That was true for the July JOLTS data and it is true now for the August ADP data.

The ADP data indicates job markets in the US are not handling the twin obstacles of rising interest rates and rising energy costs well.

Jobs Recession?

In January, the ADP jobs data showed the US economy still in the grip of a jobs recession. By May, the ADP jobs report had improved to a point where jobs recovery became a far more plausible view of the data.

From June onward, the jobs recovery hope has been fading steadily, leading us back to the uncomfortable question of whether the economy is slipping back into jobs recession after an all-too-brief jobs recovery.

In January, a jobs recession month, ADP charted 22,000 new jobs, well below the August level of 38,000 jobs. However, August is the worst ADP jobs report since January.

Does 38,000 jobs created put the US economy back in jobs recession? Potentially, especially considering that July’s ADP report started out at 44,000 jobs before improving slightly to 46,000 on the August revisions.

Does the ADP report having missed the Wall Street consensus estimate by some 10,000 jobs alter expectations for the upcoming Employment Situation Summary report? The common sense answer is that it should. Both the ADP report and the BLS report charted stronger jobs numbers in March, April, and May, and both reports have charted progressively weaker job numbers in June and July. The continuation of the cooling trend on the ADP report for August suggests that the same continuation will be seen in the BLS report as well.

How much of the cooling trend in job growth since June is due to economic fallout from the war with Iran? There is, of course, no easy quantification which can be done to answer that. What is indisputable, however, is that market interest rates have risen steadily since the war began at the end of February. Equally indisputable has been the rise in fuel prices at the pump, as well as benchmark crude oil prices. An economic environment characterized by rising costs is never, as a general rule, going to be particularly conducive to job growth.

As it is certain the war with Iran is, at the very least, not helping fuel job growth, we should not be surprised if job growth continues to deteriorate so long as the war with Iran continues. If war with Iran brings the world’s economies to the brink of an oilpocalypse through continued pressure on oil prices and oil supply, job growth is also sure to be significantly impacted by that outcome.

Has the US returned to jobs recession? The data might not yet be there for us to confidently say “yes”, but the data definitely is not there for us to confidently say “no.”

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The number of job openings was little changed at 7.3 million in July, the U.S. Bureau of Labor Statistics reported today. Hires and total separations both changed little at 5.1 million. Within separations, quits (3.1 million) and layoffs and discharges (1.7 million) were little changed.

We should not pretend that “little changed” is at all the same as “unchanged.” Relative to some previous months, the changes in the JOLTS jobs data were fairly small—and that is precisely the problem.

A conspicuous lack of both hiring and firing means there is not a lot of labor turnover, period. A lack of labor turnover means a lack of job market volatility, which in turn means a jobs market that is just this side of completely frozen.

A jobs market locked in stasis would be a major red flag on the US economy. The July JOLTS report portrays a jobs market close enough to stasis that it qualifies as a minor red flag.

Corporate media wants to believe otherwise, but the low hires and separations totals yields a grim outlook for the US economy over the next few months.

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Job Openings Ticked Up…Hooray!

While hiring and separations fell in July, reported job openings rose.

The Associated Press viewed this as a sign that US jobs markets were “ambling”.

The American job market is hardly booming, but it is ambling along despite an energy shock caused by the fighting with Iran that has squeezed family budgets.

Bloomberg spun the numbers as a sign of “stability”.

The report signals the labor market remains in the low-hire, low-fire environment that has defined much of the past few years. Employers may be cautious about expanding headcount amid geopolitical uncertainty and persistent inflation, but they have also been hesitant to let go of employees.

The Indeed Hiring Lab had perhaps the most honest assessment, that this “little changed” report might be reflective of a new normal for job markets.

For those looking for some kind of definitive turning point (in either direction) after months of similar job market dynamics, this report isn’t it. Job openings were little changed at 7.3 million, up from a downwardly revised 7.2 million in June. The hires rate fell to 3.2%, quits ticked down to 1.9%, and layoffs dropped slightly to 1%. We’re a ways off from the days of 8 million or more job openings in a given month, but the truth is the market doesn’t need to have that level of open jobs anymore to continue chugging along as it has. The labor market remains low-hire and low-fire, and at this point, it’s starting to look less like a phase and more like the new normal.

That may be the case—we certainly have seen enough low-hire, low-fire JOLTS reports to argue that is the case—but if it is, that’s not at all encouraging.

We should note that the July Employment Situation Summary shows the overall Employment Level in the US has dropped by nearly 2 million workers since last December.

The total Civilian Labor Force has declined by more than 2 million.

This “new normal” apparently is one where the US is losing workers, and is continuing to lose workers.

Labor force shrinkage is never a good sign for any economy. Ideally, a growing economy means more businesses producing more goods and needing more workers. If the US economy does not need so many workers, it very likely means the US economy is not growing as some have reported.

If the low-hire, low-fire labor market environment indicates a lack of confidence by workers in being able to find a job alongside a lack of confidence by employers in being able to find workers, it would be quite consistent with ongoing labor force shrinkage.

That would be a problem, and not a small one.

Nonfarm Net Hiring Declined Due To Government Job Loss

Superficially, the net hiring (Hires less Separations) for the total non-farm job market was in the negative for July.

July was the third month total nonfarm net hiring was negative.

However, the consolation in that negative number is that it is driven by government job loss. When we look at total private net hiring, we see some job growth on the month.

We are not seeing anything like the private net hiring we saw in March or April, however, as July was the third worst positive job growth month since January 2025.

Job markets have indisputably chilled in just the past few months. That is not a good sign in any economy.

The next few months may end up proving even worse, however. Even within the JOLTS, not only were the July numbers not encouraging, the June numbers have been revised downward almost completely across the board.

The number of job openings for June was revised down by 177,000 to 7.2 million, the number of hires was revised down by 16,000 to 5.3 million, and the number of total separations was revised down by 14,000 to 5.3 million. Within separations, the number of quits was revised down by 19,000 to 3.2 million, and the number of layoffs and discharges was revised up by 19,000 to 1.8 million.

The JOLTS data also suggests we may have significant revisions in the upcoming August Employment Situation Summary. A sizable portion of job sectors have shown less job growth in last three months’ JOLTS reports than in the corresponding Employment Situation Summary.

Where job sector growth is overstated in one month, we can expect corrections and downgrades over the next few months.

The variances between the JOLTS data and the Employment Situation Summary data reminds us that the BLS still has not weaned itself from Lou Costello Labor Math.

Job Sectors Cooled Across The Board

The most disconcerting aspect of the JOLTS report was that, outside of Construction, job growth in July cooled across the board.

Construction did great in July, according to the JOLTS data.

Construction was the only sector to have a good month.

Manufacturing and Healthcare showed some job growth, but noticeably less than in June.

Professional Services, Trade Transportation & Utilities, and Leisure all charted job loss in July.

Less job growth and even less jobs do not signal a robust labor market or a vibrant economy.

For all of corporate media’s spin, the data in the July JOLTS report does not signal stability, sturdiness, or resilience. The data in the July JOLTS report signals slowdown, weakness, and potentially another jobs recession.

But…PMIs

If we looked solely at the July JOLTS report, we would get one perspective of US job markets. Necessarily, we would be getting a skewed perspective as a result.

The JOLTS data is telling us that the US economy is heading into a rough patch over the next few months. However, the JOLTS report is not the only economic signal we have, and a proper understanding of the US economy includes looking at several signal sources to see where there might be overlap, or where there is noticeable variance.

When we look at the Institute for Supply Management Purchaser’s Managers’ Index data, for example, we see signs of an economy that is doing rather well for itself.

The Manufacturer’s PMI has charted growth since January.

Manufacturing employment per the ISM PMI data warmed up in July, leaping from contraction in June to a robust 54.6 in July.

For its part, the ISM Services PMI has been charting growth since before 2025.

However, the ISM Services Employment PMI plunged in July, going from moderate expansion to moderate contraction.

Just as the JOLTS report presents a perspective of weak and receding US labor markets, the ISM PMI data suggests a relative robust economy with at least manufacturing employment expanding.

The Federal Reserve Capacity Utilization data indicates the economy is growing, reversing the years-long downward trend that prevailed during the Biden-Harris Reign of Error.

The Fed’s Industrial Production indices show similar growth trends since the start of the year.

Behind both the positive and negative economic signals is a context of rising market interest rates, highlighted by Treasury yields which have risen significantly across the entire yield curve since the beginning of March, when the war with Iran began.

Investment capital has become more expensive since the war with Iran began.

With a number of diverse signals indicating the economy is doing well, what are we to make of the negative JOLTS data?

The JOLTS data might be signalling that the economic growth being seen in the PMI indicators and capacity utilization data is unsustainable. If the job numbers persist in this stagnant low-hire, low-fire volatility range, it is only a matter of time before the lack of job growth pulls the economy back down to earth.

By the same token, the economic growth indicated by the PMI and capacity utilization data could be about to pull the job growth data upwards. If those growth trends are maintained, eventually they have to translate into greater job growth.

Viewed another way, if market interest rates continue to rise due to the war, they are likely to choke off the expansion being charted by rising industrial production and capacity utilization. If market rates reverse and move lower, they are likely to stimulate a thaw in job markets.

One set of indicators is almost certain to pull the other set of indicators towards its reality. Which set does the pulling and which set gets pulled is a question only time and the constantly unfolding war with Iran answer.

What Next?

What is the JOLTS report telling us is coming next to US labor markets? If the current trends continue, what is coming next are weaker US job markets, less job growth, and potentially another jobs recession.

When it comes to the BLS jobs data especially we need to proceed with a certain skepticism. We know that revisions to the data have long been the norm, and continue to be the norm. As a consequence, we need to be careful about declaring both a jobs recovery and a jobs recession.

We have now had three consecutive months of less than glorious JOLTS reports. Two of those three months we had similarly downbeat jobs reports from both the BLS and ADP.

We may not be in an outright jobs recession yet, but three different jobs reports from three different surveys are painting a picture of US labor markets which has worsened significantly over at least the past two months. Job growth has slowed over that time period, even if the overall economic outlook has stayed upbeat and positive.

Given that we are still very much at risk of an “oilpocalypse” outcome to the war with Iran, the same skepticism we need for the jobs data we need to maintain for all economic data. If a worst-case oilpocalypse occurs, we can expect all the economic indicators which are currently presenting an optimistic view of things to reverse completely.

If we avoid an oilpocalypse altogether, continued economic growth will eventually translate into substantial job growth.

If President Trump wins the war with Iran outright, and especially if there is regime change within Iran, both the broader economic indicators and the jobs data from ADP and the BLS will likely move significantly upward.

Which outcome we get depends almost entirely on what happens in the Persian Gulf. As recent events in the Persian Gulf demonstrate, the trajectory of that war can change very quickly, oscillating between lulls, ceasefires, and escalations with regularity, making a prediction about how that war ends quite difficult if not impossible.

Despite that, what unfolds in the Persian Gulf is impacting oil prices, fuel prices, and a number of commodities prices. We should not be surprised to see job growth being hampered as well. Heightened uncertainty and heightened cost are not economic environments conducive to robust job growth.

As long as the war with Iran drags on, we are likely to continue to see disappointing job reports.

How the war ends with Iran, and when, will determine whether future job reports will get better or much, much, worse.

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Wall Street was not long in giving its take on his speech—investors were not pleased. Warsh proved to be every bit as effective as his lamentable predecessor Jerome “Too Late” Powell in spiking equities and goosing Treasury yields.

If we look closely at what he actually said, it’s not hard to understand why Wall Street was non-plussed. Despite giving one of the longer Jackson Hole keynote addresses in recent years, Warsh failed to give a clear message on anything. Far from charting a clear course or drawing clear policy lines for the Federal Reserve going forward, Warsh’s speech was a muddled mess, a pile of words that were more salad than substance.

Wall Street likes clarity. They didn’t get it from Kevin Warsh on Friday.

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Wall Street Nonplussed

Markets began last Friday on a burst of optimism, with equities rising and Treasury yields dropping.

Then Kevin Warsh opened his mouth. After that, equities and yields went south.

There’s no denying the timing. Kevin Warsh began his address at 10:00AM eastern time, and finished just after 10:30. Just after 11AM, all three major stock indices reversed and remained in decline the rest of the day.

Treasuries were even quicker to respond, rising almost as soon as he took the stage and not stopping throughout the trading day.

Even gold, silver, and Bitcoin—presumed “safe haven” assets when inflation is not under control and monetary policy is askew—dumped on Warsh’s words.

Wall Street clearly took no comfort in what Kevin Warsh had to say—probably because it’s not clear what Warsh had to say. Even corporate media found his message on inflation mixed and muddled.

Warsh’s closely watched remarks at the Fed’s annual symposium in Jackson Hole, Wyo., avoided committing either to forward guidance — or verbal cues about the Fed’s intentions — or reaction function, the economic signals that would warrant an adjustment in rates.

However, he did acknowledge that inflation is running hot, saying, “while this summer’s [inflation] readings were better than expected, they do not tell me that underlying trends have meaningfully improved.”

He added, “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job . . . our mandate . . . and our charge to keep.”

What Kevin Warsh did do was persuade Wall Street that next month there would be an interest rate hike, because “inflation”.

Traders added to bets on a ‌September rate hike after Warsh also said he felt recent inflation data did not suggest a change in trend.

Traders are now split between a rate hike and ⁠a hold in ⁠September, as they were before inflation data this month painted a mixed picture.

“Why the market is modestly ​reacting is he (Warsh) is very adamant that the 2% inflation target is going to remain. He is reiterating the hawkishness, but in a more of a consistent way than an incremental way,” said Mark Hackett, chief market strategist for Nationwide.

“There’s been somewhat misguided thoughts among investors that this would soften a little bit. Clearly, that’s not the case.”

The hawkish stance with no follow up on policy is becoming a recurring theme for a Kevin Warsh address. He has been similarly hawkish on inflation in his FOMC press briefings, and has similarly frustrated Wall Street with his lack of policy specifics for how the Fed will respond to that inflation.

Investors were disappointed last month when Warsh promised to restore price stability but refused to offer a detailed roadmap. He remains reluctant to provide detailed guidance on where interest rates might be going in the near future. Warsh says such commentary can tie the central bank’s hands and also distort market signals about where the economy is going.

Forbes Magazine took the “stiff medicine” approach that Wall Street may not have heard what it wanted, but rather what it needed, which is to do their own research and form their own conclusions on inflation and economic trends in this country.

Will the Fed cut, hold or perhaps signal that rates need to remain higher for longer? Those questions matter, but they miss the bigger story emerging from the Warsh Federal Reserve. Warsh is changing the relationship between the central bank and financial markets, and market participants may have to get used to doing more of their own homework.

That shift may ultimately prove more consequential than whether the Federal Open Market Committee moves the federal funds rate by 25 basis points at its next meeting. Warsh appears to believe that the Federal Reserve should clearly explain its objectives and the economic principles guiding its decisions, but it should not provide investors with a detailed roadmap of future interest rates. The Fed should conduct monetary policy. Markets should study the evidence and determine prices.

As a matter of core principles, the idea of financial markets not taking investing cues from the central bank is a good one. However, the theory behind that idea tends to collide with the reality that the Federal Reserve frequently opts to muck around in those same financial markets, as it did in 2023 when regional lenders Silicon Valley Bank and First Republic Bank went through highly visible collapses in no small part because the Fed’s interest rate manipulations undermined both banks’ considerable investment in long-dated Treasuries.

If the Fed wants to avoid inflicting similar chaos on markets in the future, the Fed chair has little choice but to give investors a clue where interest rates are heading, to allow them to hedge Treasury investments accordingly.

Kevin Warsh may not like forward guidance, but unless the Fed is prepared to be completely hands off in banking crises, a policy of “no guidance” is hardly an improvement.

Looking at equities and Treasuries, that is also how Wall Street views the situation.

Task Force AI

Even beyond the muddled messaging that Wall Street noticed, Warsh displayed an intellectual hubris that was quite at odds with his call for the Fed to be “humble”. That was most prominently on display when he tried to talk about the coming role for Artificial Intelligence in the US economy by first admitting that he knew next to nothing about what that role might be.

Will the application of AI cause a significant sustained rise in productivity across the economy? If so, when?

Will token usage be complementary or competitive to labor?

Will the next generation of AI models demand even greater capital intensity too? Or will the models themselves help devise a capital light solution?

Among the other yet unknowns is the resulting market structure. Who gets to make the money? It’s not obvious where the returns on capital will land or on what time scale.

Early on, how much of the surplus goes to owners of scarce assets, the AI labs or chip makers or energy producers or cloud providers?

Over time, how much of that value accrues to businesses and consumers? And importantly, what are the implications for workers and for the employment side of the Fed’s mandate?

How will Kevin Warsh solve his apparent AI illiteracy? One of his five magic task forces—the one on productivity and jobs—will take it upon themselves to figure out AI and then educate the Fed Chair on the topic.

Well, we’ll be thinking through these matters with the help of a task force on productivity and jobs.

The task forces were an idea Warsh broached in his first FOMC press briefing in June. The Fed formalized the task forces in July, naming a number of Wall Street insiders as well as former Fed officials.

Interestingly, or perhaps disturbingly, some of the task force members, such as former Bank of England Governor Mervyn King and former Reserve Bank of India Governor Raghuram Rajan, do not even have established backgrounds in American banking and commerce. Wall Street is neither London nor Mumbai, and the possibility of the task forces promoting a globalist model of governance will almost certainly raise a few eyebrows.

With the task forces noticeably well supplied with Wall Street names such as venture capitalist and former tech wunderkind Marc Andreesen—who will sit on the productivity and jobs task force which Warsh has charged with answering all things AI—and Doug McMillon, former CEO of Walmart, Wall Street might perhaps be forgiven for thinking that Kevin Warsh would be inclined to give a Wall Street friendly speech. However, for Warsh to do that he would have to actually say something, and, as he made clear in his two FOMC press briefings thus far, saying something is not the Warsh way.

What is most disappointing is Warsh’s blithe acceptance of the Wall Street narrative on AI, that it is the “next big thing” and the single most important innovation of the 21st century. Warsh gave no indication he is even aware of the severe shortcomings in AI search engines documented last year by the Columbia Journalism Review, or the running list of major AI errors and faux pas which suggest such problems are not getting any better. Warsh might be waiting for the task force to tell him about the PwC Global CEO Survey earlier this year which found more than half of the companies surveyed have yet to see any financial benefit to AI.

AI may be Wall Street’s latest obsession, but it has not even begun to make good on claims that it will be a game changer in either the American or the global economy. Kevin Warsh remains blissfully unaware of these things.

The Holy Grail Is Still The Quest

For all of Kevin Warsh’s skepticism about “forward guidance”, he remains firmly anchored to another misbegotten recent idea at the Federal Reserve: that 2% year on year inflation should be the Federal Reserve’s policy Holy Grail. On that point he was explicit:

The Fed’s price stability objective of 2%, as measured by the PCE price index, is a firm, fixed target.

Since one of Warsh’s ballyhooed task forces is supposed to be reviewing the Fed’s inflation frameworks, his commitment to the 2% benchmark is at best a premature stealing of task force thunder, and at worst a complete sabotage of the inflation frameworks task force’ mission.

The reality of the publicly stated 2% inflation target is that it was something that both Paul Volcker and Alan Greenspan—the two Fed Chairs of the closing decades of the 20th century and arguably the most influential Fed Chairs in history—opposed. Volcker was arguing against the practice as late as 2018, pointing out the ironic inefficacy of the target in achieving price stability:

I puzzle about the rationale. A 2 percent target, or limit, was not in my textbooks years ago. I know of no theoretical justification. It’s difficult to be both a target and a limit at the same time. And a 2 percent inflation rate, successfully maintained, would mean the price level doubles in little more than a generation.

In 2001, Greenspan, while still Federal Reserve Chairman, flatly rejected the idea of an inflation target as misleading.

‘’A specific numerical inflation target would represent an unhelpful and false precision,’‘ Mr. Greenspan said at a monetary policy conference sponsored by the Federal Reserve Bank of St. Louis.

While the Federal Reserve’s Federal Open Market Committee had adopted 2% year on year inflation as an implicit target over the course of multiple FOMC meetings during the 1990s, Greenspan was emphatic to the Committee members at the time that the target should never be made public, as the Federal Reserve’s own history on the inflation target attests:

With an eye on potential political and market blowback, he warned, “I will tell you that if the 2 percent inflation figure gets out of this room, it is going to create more problems for us than I think any of you might anticipate.”

Making the 2% target public was the 2012 brainchild of Ben Bernanke, Alan Greenspan’s successor as Fed Chair. Bernanke, we should note, was the driving force behind the interest rate hikes which imploded the subprime mortgage market in 2006-2007, leading to the 2008 Great Financial Crisis. Bernanke was also the architect of the FOMC press briefings, begun in April 2011, where much of the “forward guidance” Warsh has panned previously became established Fed practice.

Nor is the 2% inflation target completely supported by Federal Reserve officials. As Brookings economist David Wessel noted in his 2018 paper on alternatives to the 2% target, several Fed policymakers favor reexamining the inflation target, either to raise the target rate of inflation or to adopt a different policy framework altogether.

Nonetheless, several current and former Fed policymakers advocate examining the merits of keeping, changing or replacing the 2 percent inflation-target framework so the Fed can better to manage the economy in the years ahead. The choice matters: The framework guides Fed officials as they decide when and how much to move interest rates. With a different framework, the Fed might not have been raising short-term interest rates so much in 2017 and 2018. The framework influences financial market expectations and, thus, the level of longer-term interest rates and the stock market. If credible, a framework gives businesses and consumers, borrowers and lenders, an idea of how much inflation to factor into their decisions. And, importantly in a democracy, a well-explained framework gives citizens and their elected representatives a yardstick against which to measure the Fed’s performance.

Wessel’s thesis from 2018 arguably would be a plausible point of departure for Warsh’s inflation frameworks task force, but how much traction can the task force hope to get if Warsh is declaring his support for the 2% inflation target even before the task force has had a chance to get started?

Warsh’s Words More Salad Than Substance

While Kevin Warsh’s speech at Jackson Hole managed to strike a hawkish note on inflation, despite all the words spoken he said nothing about how he would tackle that inflation. Most of the speech was long-winded word salad rather than substance. The only two messages that Wall Street heard clearly were “inflation is still a problem” and “don’t count on the Fed for clarity.”

Neither message was one to fill investors with confidence, and market behaviors after Warsh’s keynote address demonstrated how little confidence investors took away from his address.

Warsh said “AI is big" but admitted he didn’t know how or why, or even if it would continue to be big.

Warsh said “inflation is a problem” but offered no clue how the Fed planned to tackle it.

Warsh said “forward guidance is a bad idea”, but managed to persuade Wall Street that “no guidance” was an even worse one.

As Wall Street demonstrated numerous times during Jerome Powell’s Reign of Error atop the Federal Reserve, muddled and unclear messages from the Fed podium will send equities south and Treasury yields north, the complete opposite of what good news and positive messages are supposed to catalyze in financial markets.

As Wall Street demonstrated on Friday, investors are showing no more confidence in Kevin Warsh than in Jerome “Too Late” Powell. That’s a problem for Kevin Warsh, and not one that is going to simply disappear any time soon.

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One of the keynote addresses is always by the Federal Reserve Chair, which means this was Kevin Warsh' turn to pontificate on Federal Reserve policy amid the Grand Tetons.

This is his address. The full text of his remarks are below (autotranscription by Substack transcription engine).

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The Speech

The full text of Kevin Warsh’ speech:

Good morning, Kristin. Thank you for that super kind introduction.

It was 25 years ago that we were colleagues. It’s an honor to share the stage with you. It’s great to be back here in the Valley again. I see so many familiar faces from academia, from my last tour of service, and from my first 100 days, which is just this weekend. I’ve been looking forward to this weekend.

And before I go further, I want to thank Jeff Schmidt and his team for the incredible hospitality. Everybody here is in debt to you and to your colleagues here at the Federal Reserve Bank of Kansas City. Jeff, our thanks to you and your team.

Now he and the other planners here have some recreation options lined up for later today. I’d advise you to be very careful with your choices. As I learned years ago, you can take two different kinds of hikes on the trails around Jackson. I can sum up my hikes with former Vice Chairman Don Cohn with two words, I survived.

These steely marathon death marches reveal the side of Don that I was not ready for.

But there’s another kind of hike. This one was with former Chairman Ben Bernanke, another dear old colleague. With Ben, it was a much more leisurely pace. Easy stroll along the wandering trails of the Rockefeller Preserve.

So before setting out today, my recommendation is do a wellness check. Ask yourself, is this a Cohn Day or a Bernanke Day?

The best thing about this gathering is that it helps us all get out here to the mountains and clear our minds and think straight about our world and our time. For me, it feels like the right place and the right audience for real engagement with the ideas that matter most. Innovation, as Kristin mentioned, is the conference theme. And I believe the public and the markets understand that innovations in the conduct of Fed policy will help deliver price stability alongside full employment. So here’s a quick overview of what I’ll cover in my remarks this morning. You can call it an outline. Call it a trail map, but please just don’t call it forward guidance.

First, I’ll touch on a few of the longer term questions we’re asking at the Fed about the latest general purpose technology AI and where it might take the economy.

Then I’ll reflect a bit on the practice of forward guidance and the interaction between the central bank and financial markets.

Next, I’ll present some of the key principles That I believe should guide the conduct of monetary policy.

And finally, I’ll give you my assessment of what’s happening in the economy.

So first, I think we should try to prepare a bit for future policy conjunctures. With the unchanging picture of the Tetons as our backdrop, we are here to survey an economic landscape that is anything but static.

It wasn’t so long ago, including in rooms like this, in the run-up to the crisis of 2008 and over the decade that followed, when economists and policymakers were speaking of secular stagnation, speaking of a global savings glut, it was a widely held view that an excess of capital would sit on the sidelines for a very long, long time because there just wouldn’t be enough compelling investment opportunities.

All the good stuff, you’ll recall, had been invented, so growth would be low and slow.

Well, times sure have changed. We’ve come to a hinge point in history, to borrow a phrase, a framing from my former mentor, George Shultz.

To cite the clearest example, progress in AI, the 80-year-old name for the newest technology, has been faster even than its evangelists predicted just a couple of years ago. The potential for substantially higher growth is on the rise. Ever expanding pools of capital pouring into AI related infrastructure of all sorts.

A kind of super Moore’s Law seems to be playing out.

Scaling laws too are changing both the method and speed of innovation. Capital and labor have combined to create large language models at the heart of AI. Users buy tokens to gain access to these models. Reports put annualized token sales for the two leading labs alone at more than $100 billion, an increase of 500% from just 12 months ago.

We at the Fed, we watch all this attentively. We recognize that AI is a new variable, potentially a new factor of production that will have consequences both for the economy and for the conduct of monetary policy. It opens up some major lines of inquiry.

Will the application of AI cause a significant sustained rise in productivity across the economy? If so, when?

Will token usage be complementary or competitive to labor?

Will the next generation of AI models demand even greater capital intensity too? Or will the models themselves help devise a capital light solution?

Among the other yet unknowns is the resulting market structure. Who gets to make the money? It’s not obvious where the returns on capital will land or on what time scale.

Early on, how much of the surplus goes to owners of scarce assets, the AI labs or chip makers or energy producers or cloud providers?

Over time, how much of that value accrues to businesses and consumers? And importantly, what are the implications for workers and for the employment side of the Fed’s mandate?

Likewise, we don’t yet know the equilibrium price of the tokens that give access to these models. Might there be a heterogeneity of tokens such that growing sums will be paid for the access to the best models, those at the frontier? Will token prices for older models fall to the level of their marginal cost?

Well, we’ll be thinking through these matters with the help of a task force on productivity and jobs.

My early check-ins with the leaders of that task force and the rest have been very encouraging. To be clear, though, their recommendations will come later and have no bearing on decisions we make in the current policy conjunction.

But I believe that for future policy challenges, this intellectual investment today will leave us much better prepared for tomorrow. Next, let me say a word about forward guidance and its substitutes. As our task forces go about their work, as you might know, I’m not waiting to introduce innovations at the Fed to help make us fit for purpose.

To highlight one example, I’ve set out to change the form and function of the Fed Chairman’s so-called forward guidance.

You might know about my long-time discomfort With early pronouncements of future policy decisions, I much prefer another path, and now will make the case for it.

Transparency in communications about future policy decisions is not an end unto itself. Communications must be in service to the Fed’s paramount responsibility. And what is that that’s getting policy right?

Forward guidance as a regular practice was adopted by my colleagues and me during the global financial crisis. It was essential at the time, and we introduced it with much fanfare. But as with other legacies of crises past, I believe the practice has outstayed its welcome.

In normal times, the role of forward guidance should be limited and circumscribed. Otherwise, it risks creating ambiguity In the name of clarity, oversharing policy deliberations and overcommitting to future decisions can lead markets, businesses, and households astray.

And I believe when policymakers make quasi-commitments on interest rates throughout the cycle, we inhibit our own freedom to make the right calls when it’s time to decide.

To get policy right, we also need to get the relationship right Between the central bank and financial markets, the Fed needs clear market signals as unfiltered as possible.

From market internals, from the level and change in asset prices across sectors, the prices and trading volumes of Treasury securities, the foreign exchange value of the dollar, the cost and availability of credit, Broad set of commodity prices.

These and other indicators should inform the Fed’s near-term outlook on economic activity and inflation throughout the business cycle. They should also reveal the state of broader financial conditions and the risks and uncertainties of the financial cycle.

At the same time, market participants themselves Should be tracking real information about the real economy. They should draw their own conclusions, form their own expectations on things like output and employment and inflation. And they too should stay sharply attuned to risks.

In my view, the Fed should be humble and never naive. The Fed plays an essential role in the economy and markets. Our tools are powerful. We determine the path of short-term interest rates. And market participants will always try to anticipate what we will do next. But we should not indulge a regime in which market participants are looking primarily to the Fed for their next trade.

The economic literature has long described the distorting effects, what it called the Hall of Mirrors problem. If markets rely materially on the Fed’s guidance and the Fed relies on market prices, we’re more likely to be blinded to new developments, more likely to be caught unprepared, and more likely to commit errors in policymaking.

Now perversely, market participants are unlikely to bear the biggest costs of the Hall of Mirrors problem. The most serious harm is likely to befall those without any financial assets.

If the Fed gets inflation wrong and judges the economy wrong, who gets the worst of it? Not the financial high flyers. Hard-working Americans are the ones left to deal with inflation that’s too high or jobs that suddenly appear less secure.

So, if forward guidance is ill-suited to normal times, How about the new Fed chief commits at a meeting just like this to some explicit reaction function? Surely he could tell us his interest rate path if, say, the data were to come in hot or cold.

Well, I wish our understanding of the economy were so precise as to provide a mechanical tried and true answer that some simple function, like a Taylor rule, could be rigorously relied upon.

But our knowledge just does not extend that far, at least not yet. And other factors most relevant to the proper conduct of monetary policy, they change over time. Providing forecasts to illustrate the Fed’s reaction function works better in theory than in practice, better in the lab than in the field.

I am not alone in noticing that forward guidance in 2021 To cite just one example, might well have slowed the policy response to high inflation. In my term as chairman, my colleagues and I will endeavor to construct more reliable models, more robust rules, and we’ll do this knowing that accuracy in forecasting is still just an aspiration.

With so much changing so fast in our geopolitics, global supply chains, technology, it’s wise to be modest about what we can and cannot know as we sit here today.

In the same spirit, we should receive the full range of ideas on matters that may inform the Fed’s monetary policy discussions.

If the aim is optimal decision making, and it should be, we should not crowd out views on the economy.

How then to chart a better path to policy?

In the balance of my remarks, I will share with you some key principles that guide my thinking on the appropriate conduct of monetary policy, and then I’ll offer my promised assessment of the economy. So let’s turn first to principles.

First, I’ve noticed in this line of work, yesterday’s news has a way of getting mistaken for what’s happening right now. The challenge is to know the difference.

In other words, we must interrogate reality, make sure we’re not setting forward-looking policy based on stale or inaccurate data, nor should we rely on isolated data points. Trends matter most.

The Fed’s a decision-making agency. We make choices amid uncertainty, and the data upon which we draw must be relevant, contemporaneous, accurate, And as actionable as possible.

Second principle. The Fed’s actions are intended to ensure that the aggregate demand side of the economy is broadly consistent with aggregate supply. However, all we observe directly is activity. We never see and can only infer what’s really happening on the supply side.

Hence, evaluating the current and expected balance Between aggregate supply and aggregate demand is imprecise. Third principle, there should be no misunderstanding. The Fed’s price stability objective of 2%, as measured by the PCE price index, is a firm, fixed target.

Let me be equally clear about another aspect of this objective. Price stability is not self-executing. Nor is inflation necessarily reverting. It’s the Fed’s job to deliver stable prices, no excuses.

Fourth principle, the Fed also bears responsibility for maximum employment. Achieving both sides of our mandate over the medium term is not an either or proposition.

I do not believe the Fed’s dual mandate works at cross purposes. After all, high inflation itself is very harmful to economic prosperity.

Fifth principle, short-term interest rates are the predominant tool to achieve the dual mandate. Unconventional policies to spur economic activity may suit genuine crises of which we all have much experience, but they should otherwise be used sparingly, if at all.

Sixth, money matters. I know it’s not fashionable these days, but my view is that money has something important to do with monetary policy. We should pay attention to money created by the central bank and money that comes from the banking and financial system. It’s true that financial innovations, the subject of this conference, and other factors alter the mechanics that link the monetary base, the velocity of money, and the broader economy.

But that is scarcely a reason to ignore the ultimate effects of money on financial conditions and prices.

Finally, a quieter Fed, a more purposeful Fed in its communications, is better able to meet its objectives. And we can be held accountable for delivering on our remit. The only true test of our credibility. To borrow a line from General Chuck Yeager, at the moment of truth, there are either reasons or results.

So having heard a little bit about AI and general purpose technologies, having heard a little bit about the next policy conjuncture, a little bit on principles, let’s turn to the economy today. Given those principles, how do I read the economy?

It’s really going on outside the window. It’s a little ironic. There are no windows in this room, but they’re big ones at the Federal Reserve. And we’ve been using those in my first 100 days, and I expect we’re going to continue to use those in the period right ahead of us.

Now, you may have read in the July minutes the unanimous view of the FOMC. Labor markets were stable, output solid. But inflation remained too high.

A good majority of my colleagues and I thought the wiser course was to await new information in the intermeeting period, especially given possible developments in supply chains, investment flows, and geopolitics, before deciding whether a change in interest rate policy was advisable.

And we expressed our joint readiness to act as circumstances require. For my part today, as we sit here, I’m impressed by the overall performance of the economy, which appears to have strengthened.

One indicator of strength is how well an economy holds up under stress, how well it holds up under shocks. On that score, both Main Street and Wall Street have been remarkably resilient.

Several other observations. Business CapEx is rising rapidly. The four-quarter change in investment in equipment and intangibles has been around 9%, its highest growth rate since 2021. And more than half of the capex growth can likely be ascribed to the build-out related to AI.

What about profits? For the firms in the S&P, profits have grown more than 20% over the past year alone. Profit margins are quite elevated relative to history. Overall equity and market volatility, quite low. We’re staying keenly focused on market internals, watching performance across sectors. Expectations for both growth in capex and corporate earnings are running quite high. I continue to watch the change in the growth rates, the second derivative.

The follow-on effects on asset prices, business confidence, consumer incomes and spending are equally important to gauge.

Credit spreads on corporate bonds and leveraged loans are near the low end of their historical averages, and issue volumes this year quite strong. Looking beyond fixed income markets to the banking business, in the July so-called SLUES survey, banks tell us that standards for C&I loans are on the easier end of their historical ranges.

That helps explain their growth that we’ve seen this year in these loans.

In my view, credit and loan markets are showing few signs of policy restraint.

Now, certain sectors like housing and agriculture are showing strains, but on balance, I would be hard pressed to describe broad financial conditions as restrictive. Real consumer spending has been healthy despite these shocks, increasing more than 2% over the past four quarters.

If you combine consumption with the brisk investment we talked about earlier, Private domestic financial purchases have also risen. These purchases have increased to the pace of nearly 3% or so, so far this year. That’s a measure that typically carols more signal than GDP. The trend here, too, positive.

So on the employment side of the Fed’s dual mandate, are countries doing well? Labor markets are quite stable. The jobless rate at 4.1%, Remains low by historical standards and hasn’t changed much in a couple of years. Unemployment claims on a four-week moving average, an empirically robust real-time indicator, are near their lowest level in decades.

In my view, the relatively low turnover in today’s labor market is partly a result of the significant rematching between employers and employees that happened in the post-pandemic environment. But when labor supply is barely growing, monthly job gains are naturally going to run low. There are always areas of concerns in the labor market, for example, among recent graduates. In general, though, people who want to work, by and large, are holding or finding jobs.

They might well be concerned about future labor disruptions, but as of now, I believe the labor markets are broadly consistent with full employment. But on the price stability side of our mandate, the numbers are more concerning.

The Fed’s preferred measure of inflation, the one I talked about earlier, the 12-month change in the PCE price index stands at 3.7%, with the six-month change a little above four. The comparable measures from the CPI index are also elevated, as are core measures both of PCE and CPI inflation.

None of these measures are perfect. But they all tell a similar story. Inflation is running above our 2% target.

So the Fed’s predominant focus right now should be on prices. So what’s our job? The job for policymakers is to capture underlying trend inflation. Easier said than done.

We want to gauge whether underlying inflation is rising, falling, or seems to be stuck in place. We also want to understand not just the direction of travel, but the speed.

Each of these broad inflation measures have fallen significantly from their highs of a few years ago, but progress of the last couple of years has been more modest.

And while this summer’s PC and CPI readings were better than expected, they do not tell me that underlying trends have meaningfully improved.

The data also show moderate wage growth. But in my view, in tracking underlying inflation, wage growth has not proven a reliable indicator of future inflation for a very long time.

So to try to gauge underlying inflation, I want to tell you about a couple of things I’ve always looked to. I find it instructive to disaggregate the 199 individual components of the PC price measure.

Over the last 12 months, 54% of goods and services in this basket showed price increases above 3%. This is well below the post-pandemic highs of about 77%, but it remains well above the level of 32 in a couple of the decades that preceded the pandemic.

Looking over just the last six months, the conclusion is similar. 49% of goods and services in the PC basket, Showed price increases above 3%. Again, this is well below the post-pandemic highs, but still elevated, quite elevated.

The recent rise in overall commodity prices also bears watching. What we need to judge is whether the trends we see indicate upside inflation risks. Now it matters, too, whether the inflation readings of the past five years have seeped into expectations

The good news is that measures of inflation expectations in the medium term, by and large, look stable. And inflation compensation measures from the swaps market send a strong and similar message, especially in light of recent developments.

It’s a credit to the Fed as an institution, consistent with the best of the Fed’s traditions, that market prices show confidence that we will deliver price stability. And I can assure you, they’re right.

The thing about market measures of inflation expectations and economic history, I know some economic historians in the audience, is they all tend to look really strong and durable until they don’t. These expectations are not pushed around easily. And right now they are very well anchored. But they must be closely minded. And it’s the Fed’s job to make sure that inflation expectations do not get unanchored.

Now there is one signal nobody can miss. Responsibility for 65 months of sustained elevated inflation sits squarely with the central bank. And that’s where it belongs.

So here is my standard. We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do. That’s our job, that’s our mandate, and that’s our charge to keep.

So I’ve covered quite a bit of ground in the last 25 minutes or so. Let me see if I can conclude this way. I stand here today committed to a discipline, not a decision.

My Fed colleagues and I are hardly the first to hold these positions in a time of great consequence. We are determined to redeem the time by doing our very best work.

For those of us, those of you that know us, you’ll know the following is true. We take our responsibility seriously with humility And with resolve. We know so much depends on the choices we make.

Sound monetary policy helps households and businesses to prosper. When carried out effectively, it broadens and deepens the momentum of our economy and helps to secure America’s leadership in the world. And I know that our country needs us to think carefully and act wisely, perhaps now more than ever.

It’s a tremendous honor to serve once again at the Federal Reserve. I’m truly grateful for the encouragement, good counsel, and the warm reception I’ve received in my first 100 days from my colleagues.

I’m also honored and grateful for the views that I’ve gotten, solicited and unsolicited, from so many of you in this room. For that, and for your kind attention this morning, I say thank you. Let’s get on with the rest of the program.

Wall Street Was Not Impressed

I will have more to say about Warsh’ comments in a later article, but it is worth noting that Wall Street responded to his speech by bidding Treasury yields up.

In a performance reminiscent of Jerome “Too Late” Powell, Warsh’s lamentable predecessor, by speaking Kevin Warsh succeeded in boosting the 10-year Treasury yield by over 6bps.

Wall Street is also starting to seriously price in a 25bps increase to the Federal funds rate when the Federal Open Market Committee meets in September to decide the federal funds rate.

For its part, Polymarket now puts the odds of a 25bps rate hike at the September FOMC meeting at 50-50 vs standing pat again.

If Warsh panders to Wall Street the way Powell did, we can look forward to a rate hike next month.

Media Is Expecting A Rate Hike

Both corporate and alternative media reacted to Warsh’s speech by viewing it as a signal that a rate hike is coming.

CNBC zeroed in on his assessment of inflation and inflation risks in the economy.

Warsh at Jackson Hole gave a more hawkish reading of the economy than he had in July. He said elevated prices needed to be the Fed’s main focus and described financial conditions as not being broadly restrictive, a change from his July news conference, when he said they were uneven. He did that while swiping back at his critics and insisting his policy of deliberate ambiguity about Fed policy is here to stay.

ZeroHedge also noticed that Warsh tended towards hawkishness, while also pointing out that, for all of his words, he really did not say all that much, especially about where the Fed stood on the possibility of a rate hike next month.

Whether Warsh is accurate in his assessment of the US economy is almost beside the point, at least as far as Wall Street is concerned. Wall Street’s focus is fairly narrowly drawn on finance matters. Wall Street only wants to know if the Fed is going to raise interest rates, lower interest rates, and when.

Despite giving the longest Jackson Hole speech since Janet Yellen in 2017, Kevin Warsh refused to take any stand on interest rates.

Was it a good address? Looking at Treasury yields during and after his speech, Wall Street tended to think not. For it to be a good address, Kevin Warsh needed to say something, and Wall Street concluded he didn’t really say much of anything.

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From the preceding month, the PCE price index for July increased 0.2 percent. Excluding food and energy, the PCE price index also increased 0.2 percent.

From the same month one year ago, the PCE price index for July increased 3.7 percent. Excluding food and energy, the PCE price index increased 3.3 percent from one year ago.

Wall Street was not at all surprised by these numbers, as they were right in line with what had been projected.

The PCEPI print was also right in line with the Cleveland Fed’s inflation nowcast.