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.

In spite of an ongoing war with Iran, in spite of continued constrained oil production in the Persian Gulf, in spite of Iran’s illegal closure of the Strait of Hormuz, once again we are not seeing a lot of new inflationary pressures in the US economy. Three reasons why we should be seeing considerable inflation, and instead the trend of recent months has been disinflation.

Where is the inflation? Where is it hiding, and why aren’t we seeing more of it?

Is this a sign of the US economy’s underlying resilience and robustness, or is this a sign of lurking deflation and a looming recession instead?

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Year On Year Inflation Held Constant

The one remarkable aspect of the year on year headline inflation metric from the PCEPI was that it remained constant: consumer price inflation in the PCEPI was 3.7% year on year in June, and it is 3.7% year on year in July.

Month on month, inflation did move somewhat higher, with core inflation outpacing the headline figure.

While month on month inflation did move higher, at 0.25% core inflation’s rise was the second smallest month on month change all year. At 0.15%, headline inflation turned in the smallest increase all year, and the second smallest increase since January 2025 (note that June’s headline PCEPI print month on month was negative).

We only have to consider the pace of inflation’s rise month on month in 2021 and 2022 for perspective.

July’s increase was just not all that large compared to recent history.

Corporate media might gripe that inflation is not trending back towards the Fed’s Holy Grail of 2% year on year, but the reality of the inflation data is that consumer price inflation is not trending up either.

Energy Price Deflation?

As was the case in the CPI, the energy price inflation data in the PCEPI raises the eyebrows for July: for the second month in a row, there was energy price deflation.

For the second month in a row, we have to question the data, because the market data absolutely show energy prices rising throughout July.

Oil futures rose significantly in the month of July, by as much as 20% for West Texas Intermediate and 25% for Brent Crude.

Diesel futures rose nearly 30% here in the United States, and nearly 35% in Europe.

Even RBOB reformulated gasoline futures rose significantly in July.

Pump prices for diesel were up 15% in July, with pump prices for gasoline up 7%, according to the Energy Information Administration.

At every turn, we see signs of rising energy prices, yet somehow the BEA computed energy price deflation for July? That seems unlikely, yet the BEA—just like the BLS—managed to compute exactly that.

Food Price Deflation

Food prices came down in July, according to the PCEPI, a welcome shift from June food price inflation.

Food prices are typically more volatile than most consumer price data, which is, as readers will recall, why the BEA and the BLS break out food and energy data separately. Even so, food prices have dropped month on month seven times since January 2025.

If we step back to the year on year inflation metric, we see that food price inflation has been largely holding steady for the past year.

An important note of caution is appropriate: the PCEPI food index is a broad national index. If we look at some food items such as ground beef, we see that prices have risen at a faster pace than overall food inflation.

Prices vary region to region in the United States. When it comes to inflation data, the constant caveat will always be “your mileage will vary”.

Aside from the obvious variances, however, across the broad array of food items in the index and across the whole of the country, year on year there has not been much change within food price inflation.

Goods And Services Mixed

Goods and service prices gave mixed results for July month on month, with durable goods price inflation rising, nondurable goods price inflation falling, and service price inflation rising for the second month in a row.

If we zoom out to view these subindices year on year, we still get mixed price signals.

Durable goods price inflation has been trending up year on year, but it is the only area in the PCEPI where that is the case.

When we look at real consumption month on month in these sectors, we again do not see much in the way of inflationary pressure. Real personal consumption for durable goods declined significantly in July, with consumption for non-durable goods declining somewhat less so.

In another sign that inflationary pressures are not rising in the economy, for the first time since the start of the year real disposable income rose month on month faster than real personal consumption expenditures.

July turned out to be a savings month.

CNN took that savings figure and decided consumers were pulling back on spending because of inflation.

Consumer spending, when adjusted for inflation, was flat from the month prior, a sharp slowdown from a 0.4% gain in June, according to the report.

The Personal Consumption Expenditures price index – the gauge used by the Federal Reserve for its 2% target inflation rate – rose 0.2% from June, keeping the annual rate at 3.7%, the report showed.

Yet July was not the first time that goods spending dropped, and service spending rose month on month.

Certainly consumers are spending less in some categories, but they are spending more in others. What was different in July was that real personal disposable income rose significantly, but real personal consumption expenditures were largely unchanged for the month.

Where Are The Effects Of War?

The biggest question mark in the PCEPI data for July remains the data we are not seeing.

War with Iran is continuing, and while actual hostilities are, for the moment, de-escalating, the US is still keeping a substantial military presence in the Middle East. Oil production among Persian Gulf states has yet to return to pre-war levels, with only the United Arab Emirates producing more oil now than before the war.

We see the impacts of the war in futures markets, and in pump prices for both gas and diesel—but we do not see those impacts translating through to the PCEPI, just as we are not seeing those impacts translating through to the CPI either.

As a general rule, war is an inflationary proposition. War means governments at a minimum increase their purchases of whatever goods and services within the economy that governments need to prosecute a war effort. Increased government spending will, in short order, push consumer price inflation up.

The nature of war is to increase inflation, yet the nature of the war with Iran is that it is not pushing consumer price inflation.

The war with Iran has reduced total oil production in the Persian Gulf, which means even with the US providing convoy escorts to restore normal shipping volumes in the Strait of Hormuz global oil supply is still reduced, and the price of oil did rise throughout July. The price of diesel and gasoline rose even more. Pump prices rose as well.

Yet energy price inflation not only did not rise, it actually fell.

If the normal inflationary effects of war are not showing up in the official data, we must start to ask what could be offsetting those inevitable inflationary effects?

What is pulling prices down to keep war from pushing prices up? What energy prices are falling that rising diesel, gasoline, and crude oil prices are not translating into energy price inflation?

That is the risk the lack of significant inflation increase in the current data poses. We have clear evidences of rising energy prices, both among commodities and among retail prices at the pump. Somehow, those are being buffered enough that the overall energy subindex is still printing deflation.

In the oilpocalypse scenario for the economy, those buffers get exhausted, at which point constrained oil supply pushes a second wave of oil price shock across the world’s economies, resulting in synchronized stagflation.

If the conflict in the Persian Gulf simply dwindles, and some semblance of normal returns to the region, those buffers, rather than becoming exhausted, have the potential metastasize into a synchronized deflation for the world’s economies.

The July Personal Income and Outlays report failed to show the increase in consumer price inflation common sense and the usual patterns of war tell us should be happening. That’s a warning sign, although there is no way to tell at the moment whether that’s a warning of imminent stagflation or imminent deflation.

Welcome to interesting times!

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Given the intractability of both President Trump’s Administration in the US and the IRGC in Iran, that outcome seems unavoidable.

With that as the backdrop, corporate media was quite surprised when China watchers assessed that the Middle Kingdom may have actually added over 200,000 barrels to their strategic reserve in July.

China slashed oil imports, yet somehow slashed oil consumption even more, to the tune of approximately 210,000 barrels surplus in July.

Axios added another surprise with their reporting that the US Navy has put together a stealth operation moving as much as 10mbpd of Persian Gulf oil through the Strait of Hormuz.

The U.S. military has quietly established a shipping corridor in and out of the Strait of Hormuz to transport millions of barrels of oil each day — a notable success even as the broader war remains at a stalemate, two U.S. officials told Axios.

• Under the operation, which has been underway for the last several weeks, 15 to 20 tankers have entered and exited the strait through a southern channel along the coast of Oman.

• About 10 million barrels of oil a day — roughly half the pre-war volume — are being transported out of the strait and injected into the global energy market, the officials said.

Each report on its own paints an economic outlook starkly different from the probable scenarios intimated by the official data. That China can reduce imports and boost reserves is an indication that the Chinese economy slowed significantly to produce the surplus. That China did so even as the US has presumably found a way to defeat Iranian efforts to control the Strait suggests China’s economy may be significantly more wobbly than many might surmise.

Nor is China alone. Germany is facing energy storage challenges which could have outsized economic ramifications for the EU as a whole, running well behind its usual pace to stockpile natural gas for the winter.

Is the oilpocalypse already here? Much of the official data for China and Europe certainly invites that assessment.

The revelation of a major stealth operation to keep oil flowing through the Strait of Hormuz suggests another possibility: oil disruptions may be obscuring the reality that China and Europe are facing not an oilpocalypse, but a longer-lasting systemic deflation which will not be alleviated simply by reopening the Strait of Hormuz.

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China Slowed Everything Down To Conserve Oil

Regular readers will recall that the previous assessment of China’s management of oil imports and consumption during May and June was that China had drawn on some 1.4mpbd of its considerable reserves during May and June.

July’s outlook on China is quite the trend reversal.

The trend of drawdowns in May and June appears to have reversed in July, according to calculations by Reuters columnist Clyde Russell based on officially available Chinese data.

Unlike the United States, China does not report inventories. Analysts are looking at overall supply (domestic production plus imports) and refinery processing rates to estimate how much crude is going into reserves and how much is being processed into fuels.

Using this calculation, Reuters’ Russell has estimated that China had 210,000 bpd of crude available to go to storage in July, considering total crude availability of 12.72 million bpd (8.41 million bpd of imports and 4.3 million bpd of domestic production), and refinery throughput of 12.51 million bpd.

If the Reuters analysis is correct, China may have hardly put a dent in its estimated 1.2 billion barrels of crude oil held in reserve.

Surprising is definitely one word to describe this latest oil market wrinkle.

Ominous is another.

To be sure, China’s oil imports did rise significantly in July:

Pipeline and seaborne flows rose to 35.73 million tons in July, according to customs data released Friday. That’s up 22% from June, when shipments hit the lowest since October 2016. The volume for last month is equivalent to 8.45 million barrels a day, well below the pace in the same period last year.

That increase over June still leaves China importing at least 3mbpd less in July than before Operation Epic Fury.

As analysts writing in The Economist noted, China’s import reduction was achieved in part by reducing domestic demand.

However, ample stocks and restricted exports are not by themselves enough to explain the gargantuan reduction in Chinese imports. The Chinese government also pulled a third lever—curbing domestic demand. In June Chinese refineries processed 2.7m fewer b/d of crude than a year earlier. Production of petrol fell by 14%; output of diesel and jet fuel both shrunk by 21%.

While The Economist was gushing over China’s magical ability to turn oil demand “on and off”, the reality remains that reducing demand means shrinking the economy, period full stop.

The data would seem to confirm that China’s economy has indeed slowed down, with factory output slowing along with retail sales.

Factory output grew 4.5% from a year earlier last month, compared with 5.3% in June, official figures from the National Bureau of Statistics (NBS) showed on Monday, missing a Reuters poll forecast for 4.8% growth.

Separate figures showed retail sales grew 0.6%, a slowdown from a 1% rise in June despite summer holiday tourism spending. Forecasters had predicted 1.5%.

The NBS said extreme weather, including high temperatures and heavy rainfall, had disrupted market supply and demand.

The investment outlook in China was no better in July.

China’s urban fixed-asset investment, including real estate and infrastructure, contracted 6.7% this year as of end-July from a year earlier, worse than the estimated 6% decline in the poll. The decline also steepened from the 5.7% drop in the first half of this year.

While China apologists claimed the Middle Kingdom can turn oil demand “on and off”, even China’s official data suggests they succeeded only in turning oil demand off.

China’s Hard Data Is Not Encouraging

Drilling into China’s hard data does not reveal much in the way of economic vitality for July.

While China’s imports broadly surged in the immediate aftermath of the Strait’s closure, July saw imports taper somewhat.

Exports, while still up year on year, eased even more in July.

In yuan terms, China’s trade surplus shrank by more than 90 billion.

While China’s producer prices had been showing moderate price growth since last fall, producer prices had surged in March and April before cooling and slipping back into to producer price deflation by June.

That deflation picked up considerably in July.

In terms of specific goods produced, China’s cement production, which has been steadily slowing in recent years, decelerated even more in July.

Car production in China peaked last November, and has been trending down ever since.

Crude steel production has been declining steadily since 2021.

We should bear in mind that China’s economy has been in a parlous state for quite some time. Industrial capacity utilization has been on the decline in China since at least 2021.

Consumption has not been much better in China. Domestic demand has been weak, as attested by China’s persistent low consumer price inflation metrics.

China’s retail sales growth has been slowing for years, and slowed even further in July.

The data is indisputably indicative of a major economic slowdown. With this data coming on the heels of major reductions in oil imports, the question becomes how much of the data is due to the oil import reductions.

Did Iran closing the Strait of Hormuz deliver a major body blow to China’s economy or did the Strait’s closure merely obscure the extent to which China’s economy has continued to weaken ever since Xi Jinping burst China’s real estate bubble in 2020?

Ultimately, the end result of both narratives is the same: China’s economy is slowing even now, and has not waited on a second wave of oil price and supply shocks from the Persian Gulf. We should acknowledge that the disruption of Persian Gulf oil flows is not the only cause of China’s economic deceleration, nor is it even the initial catalyst for the slowdown; we can also see that decreasing oil imports has increased the pace of economic contraction in China.

“Oilpocalypse now” may overstate the impact of oil supply disruptions on China’s economy, but it does not completely mis-state that impact. Iran closing the Strait of Hormuz made a bad economic situation worse for China.

Far more worrisome for the world economy is the reality that China is not an isolated case. Europe has a similarly grim economic prognosis, centered on natural gas pricing as winter approaches.

Europe Heading Into A Frozen Winter Of Discontent?

Europe’s dilemma is less about crude oil and more about natural gas.

The Persian Gulf is home to one of the world’s major natural gas exporters—Qatar—and many of Qatar’s principal customers are in Europe.

While most media attention surrounding Iran’s closure of the Strait of Hormuz focuses on oil, Iran’s belligerence in the region very quickly resulted in Qatar shuttering its liquefied natural gas (LNG) facilities in early March. Iranian missile and drone attacks were later reported to have damaged Qatar’s LNG facilities, resulting in a loss of as much as 17% of their production capacity for the foreseeable future.

The impact on European natural gas prices has been predictable: prices have soared.

The sustained price increase for natural gas in Europe—currently Dutch TTF contract prices are more than double pre-war levels—poses a particular challenge, as Europe traditionally uses the summer months to stockpile natural gas at low prices to buffer heating demand throughout the winter, when natural gas prices are typically higher.

Many German gas suppliers in particular gambled on the war being short and have delayed their typical summer gas purchases. As the war drags on, and natural gas prices have not come down, Germany is facing a significant shortfall of natural gas reserves when the cooler weather arrives later in the fall.

Again, the data tells the tale. Germany’s reserve of natural gas is right at half of its total capacity, and lags behind much of Europe.

Germany’s looming gas shortage come winter poses an economic risk to the rest of Europe, as the country’s sheer size and natural gas consumption raise a threat that Germany could push natural gas prices even higher across the entire continent during the winter months.

Germany is the EU’s biggest vulnerability because its sheer size means gas shortfalls there could be felt in neighboring countries, driving up prices across the bloc if it fails to restore its reserves.

That’s prompted growing calls for Berlin to do the unthinkable: intervene outright to direct its state-controlled energy giants to buy gas at any price, abandoning years of free-market doctrine on energy policy.

With natural gas prices already elevated, Germany is facing not merely a supply shock but a supply squeeze.

At just over 50% of total capacity, German’s relative natural gas storage is at an historic low for this time of year.

Eventually, Germany is going to be buying more natural gas—a lot more. That 50% of unfilled capacity will need to be filled as winter approaches, and every day the span of time Germany has to fill that capacity shrinks.

When Germany does ramp up their natural gas purchases, prices in Europe will surge even higher than they are now. What this means for Europe is easily grasped when one considers that natural gas prices are already on par with the peak of Europe’s 2022 energy shock.

When Germany starts ramping up natural gas purchases, European prices for natural gas are going to soar to record highs. There is no way for this not to happen—a surge in demand against a more or less fixed level of supply can only result in significant price increases.

Nor is Europe’s energy vulnerability limited to natural gas prices. While crude oil prices have been amenable to at least some reductions from earlier price surges, diesel prices have been significantly less so.

While crude oil prices have risen “only” approximately 36%, diesel prices for both Europe and the United States have risen over 83%.

Even bunker fuel prices are well above pre-war levels and starting to rise once more.

As winter draws near, Europe is facing energy price inflation on multiple fronts, and at levels that promise to smother an already faltering European economy.

Already Europe’s industrial production is virtually stagnant, with little growth either year on year or month on month.

Surprisingly, Europe’s elevated energy and fuel costs have yet to translate into major producer price inflation. Much as is the case with China, producer prices cooled somewhat in June, to 4.6%.

This is lack of producer price inflation is counterintuitive, as energy prices have second-order effects on virtually all other prices, with diesel prices in particular impacting shipping and logistics costs on nearly every good imaginable.

Even consumer price inflation only rose a little in March and April before stabilizing just under 3% year on year.

If the energy price shocks Europe has experienced since February of this year have not produced significant inflation within either producer prices or consumer prices, Europe is facing the possibility that, absent energy, the overall economy is stagnating and perhaps already contracting. Much like China, the economic reversals are emerging now, on the strength of existing oil supply disruptions and the price increases to date for oil, natural gas, and refined products.

Like China, the disruptions are impacting a European economy already weakened after years of attritional economic warfare with Russia.

Stealth Shipping Corridor Has Had Little Impact

If the narrative suggested by official data on maritime traffic through the Strait of Hormuz were being sustained, the conclusion that Europe and China were indeed facing “oilpocalypse now” would almost self-evident.

That narrative is not being sustained, which adds a disturbing wrinkle to the economic woes facing both China and Europe.

Reporting as emerged that the US Navy has been organizing stealth convoys through the Strait of Hormuz, large enough to move half of pre-war tanker volumes through the Strait.

A convoy of up to 20 tankers protected by fighter jets, helicopters and ships has been ferrying up to 10 million barrels of oil out of the Gulf each night since May in a secretive US naval operation.

The US military has been leading the ships into and out of the Strait of Hormuz, but rather than taking them through the route which passes Bandar Abbas in southern Iran, the vessels instead hug the northern coast of Oman.

This tanker traffic is not being recorded in any official monitoring of the Strait, such as the IMF’s Portwatch operation. Portwatch has continuously reported little or no tanker traffic in the Strait, other than during the brief life of the Memorandum of Understanding.

Most traffic monitoring sites rely on ship transponder signals to track what vessels are actually transiting the Strait. Ships in the US Navy’s stealth convoys have been turning their transponders off, meaning that their passage does not become part of the regularly reported metrics.

The stealth convoys mean that more Persian Gulf oil is reaching global markets than previously assessed—and that has undoubtedly played a major role in buffering global oil prices, perhaps even more so than strategic reserve releases by the US, China, and others.

The stealth convoys consequently mean that the economies of both China and Europe are struggling because of factors which pre-date Operation Epic Fury. Removing Persian Gulf oil supply from global markets did not cause these problems, and replacing that oil supply in global markets will not alleviate them.

Instead of an oil-induced stagflation as had been initially feared, China and Europe are facing systemic deflation instead. That inflation has not surged in either economy is testament to a lack of inflationary pressures on both economies, and that translates into a lack of growth within both economies. That lack of growth is likely to be the near term trend regardless of the outcome of events in the Middle East.

Instead of an oilpocalypse, China and Europe are sinking into systemic deflation—something much, much worse.

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As of this writing, the Strait has not been reopened. Iran has declared the Strait closed, while the US Navy is blockading all Iranian shipping.

With the Strait of Hormuz closed, Persian Gulf oil is effectively removed from the global oil marketplace—approximately 20% of global supply is not currently accessible.

If Persian Gulf oil remains barred from the global marketplace, there is no denying what must follow: an “oilpocalypse”, the inevitable supply shock in all the world’s economies when, 20% of global oil supply having been removed from oil markets, all buffers mitigating that shortfall are finally exhausted.

With neither Iran nor the US much inclined to seek a peaceful resolution to the conflict, we are left to wonder when that supply shock will finally crash over the world’s economies?

Can the oilpocalypse be avoided even if peace is not found between Iran and the US?

The outlook is not encouraging.

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Why The Oilpocalypse?

The underlying math driving the grim forecast of a major oil supply shock is simple:

Before the war, global oil demand was estimated at 103.4mbpd, and global supply (with Persian Gulf oil flows included) was at 103.6mbpd.

OPEC output accounted for approximately 32mbpd of global supply.

Of OPEC's output, 22.4mpbd was produced by Saudi Arabia, Iraq, the United Arab Emirates, Kuwait, and Iran.

The war with Iran has disrupted the oil production of all five countries, and only one—the UAE—has in July managed to surpass pre-war production levels.

Across all five countries, aggregate July production is 5.6mbpd, or 13.9%, below pre-war levels.

In the August Oil Market Report, the International Energy Agency (IEA) assesses total Persian Gulf oil production as 8.3mbpd below pre-war levels, this after production recovery of 3.7mbpd in June and 2.5mbpd in July.

Moreover, regardless of oil production levels, since the start of the war almost no oil has moved through the Strait of Hormuz.

Bear in mind that in 2025 some 15mpbd of crude oil and another 5mbpd of refined products transited the Strait.

Even if we take into account some tankers are “running dark” by turning off their transponder beacons so as to be mostly indetectable, and so might have transited the Strait without being recorded, oil has not been moving through the Strait since March in significant volumes, except for the brief interlude of the Memorandum of Understanding. Persian Gulf oil flows have literally fallen from 15mbpd to 0mbpd, just since March.

The removal of between 8mbpd and 15mbpd of crude oil from global supply is no small deficit, given that at the end of 2025 global supply was only marginally higher than global demand. With pre-war oil supply and oil demand in near exact equilibrium, the consequence of the imposed production deficits from the Persian Gulf is both obvious and inevitable: Global demand now exceeds global supply.

Global demand is likely to continue to exceed global supply for at least the short term. The IEA projects an oil supply deficit in the third quarter which will average 1.8mbpd. This is more than double the deficit forecast in July’s Oil Market Report.

If the war between Iran and the United States continues to drag on, we should expect that deficit to only increase.

Irreplaceable Supply?

When a supply of any economic good is disrupted, the market’s inherent reaction is first to seek out replacement sources of that good. With Persian Gulf oil abruptly removed in large measure from the global oil market, the global oil market naturally is looking first to replace that oil.

To that end, seven countries belonging to the Organization of Petroleum Exporting Countries (OPEC) have committed to boosting oil production to offset the loss of Persian Gulf oil.

The Organization of the Petroleum Exporting Countries and its allies — collectively known as OPEC+ — announced on Sunday that seven countries would expand oil production by a combined total of 188,000 barrels per day in August. It was the fifth consecutive month OPEC+ agreed to raise oil outputs.

The participating countries in Sunday’s decision are Saudi Arabia, Russia, Iraq, Kuwait, Kazakhstan, Algeria and Oman

Note, however, which countries are committing to the production increases. Three of them are Persian Gulf countries, countries whose ability to export oil is precisely what is being disrupted by the war between Iran and the United States.

A fourth—Oman—sits opposite Iran on the Strait of Hormuz. While not constrained by the Strait of Hormuz, the country remains vulnerable to Iranian missile and drone attacks. It has already been attacked multiple times by Iran.

Moreover, Oman has sustainable oil output of 800,000bpd, per the latest report from the IEA. The IEA also has Oman producing, as of July, 830,000bpd. Based on IAE estimates and data, Oman has no spare capacity it can use to quickly ramp up oil production.

Algeria, with July production of 970,000bpd and sustainable capacity of 1,000,000bpd, likewise has little spare capacity with which to offset the blocked Persian Gulf oil flows.

The same IEA report assesses Kazakhstan’s sustainable oil production at 1.8mpbd. With July production at 1.55mpbd, Kazakhstan can contribute at most 250,000bpd to replace lost oil production from the Persian Gulf.

Even Russia has limitations on how much more oil it can produce. Per IEA assessment, Russia can increase its crude oil production by 640,000bpd.

Of the seven countries pledging to increase crude oil production, the four not within the Persian Gulf cannot add even 1 Million bpd to global supply. Unless the IEA assessments are wildly off-base, that is the best case scenario for replacing lost Persian Gulf oil. With a minimum loss of 8mbpd and as much as 15mbpd, the commitments made by non-Persian Gulf countries to boost production do not come at all close to replacing the lost supply.

With present known oil reserves and production infrastructure, very little of Persian Gulf oil supply can be replaced in the near term. For the remainder of 2026 at least, there are no alternatives to Persian Gulf oil, and every barrel of Persian Gulf oil prevented from making it to market is a barrel withdrawn from global supply.

Russia Has Its Own Problems

While the natural framing for an “oilpocalypse” scenario is the war between Iran and the US, we should take note of Russia’s own production dilemmas in recent months. Despite committing to increasing production, Russia’s crude oil production has actually fallen by over 400,000bpd since January, 2025.

There is no mystery as to the cause of Russia’s oil production failures: Ukraine has been notching consistent strategic wins with their deep-penetration drone strikes, in particular against Russia’s oil infrastructure, typified by last week’s drone strike on the Sheskharis oil terminal at Novorosssiysk, which resulted in complete suspension of oil loading.

Crude oil exports from Russia’s Sheskharis terminal at the Black Sea port of Novorossiysk were suspended on Friday following a drone attack, three sources familiar with the matter said, adding to disruptions at one of the country’s key export outlets.

The Sheskharis terminal, which handles around 700,000 barrels per day (bpd) of crude oil, is Russia’s main oil export facility on the Black Sea. Its shutdown adds to pressure on Russian energy infrastructure, which has come under repeated attack in recent months.

The administration of Novorossiysk issued a fresh drone alert for residents on Friday, indicating a continued threat to the port area.

Ukraine has also had success in oil refining, impacting domestic gasoline supply especially, with a separate drone strike last week shutting down a refinery near Orsk for at least six months.

"Shrapnel damaged key infrastructure that cannot currently be repaired. The equipment is imported, and due to sanctions, repairs could take up to six months. The plant has completely shut down," Yevgeny Solntsev, governor of the surrounding Orenburg region, posted on social media.

For Russia, the consequence of these drone strikes is to bring home to the average Russian civilian the impact of the war in Ukraine. Solntsev has responded to the damage done to the Orsk refinery by rationing gasoline within the oblast.

The last terrorist attack of the enemy has created certain problems for us. We have to change the logistics of delivery of fuel. Work began quickly, it is impossible to delay here. A number of negotiations were held. But this forces us to introduce certain measures. In order to preserve at the same level the work of emergency services: medical care, fire protection, law enforcement and other structures, as well as public transport, the operational headquarters of the region decided to impose restrictions on the release of fuel for individuals and legal entities.

Nor are the disruptions limited to a few areas within the Russian Federation. Sochi, Krasnoyarsk, and Bashkortostan are all regions where fuel rationing has been implemented. Additionally, Long gas lines are being reported across Russia as well as those portions of eastern Ukraine under Russian control.

FAS continues to monitor prices: in the Saratov and Bryansk regions they were reduced after warnings. The service opened cases against gas station operators in the Krasnodar Territory and the Zaporizhzhia region.

In some Russian regions, a second wave of fuel shortages has begun. About this Business FM told subscribers in social networks. Difficulties are observed from the Krasnodar Territory to Primorye.

With falling production and increasing shortages of refined products across the country, Russia is hardly a credible alternative buffer to oil flows out of the Middle East. It is having enough trouble simply by producing at the levels it has been.

Demand Must Fall To Match Supply

The ironclad governing rule of all systems, including markets, is that they must always trend towards an equilibrium position. Everything must balance. Force pulling one way must be offset by forces pushing another.

In oil markets, that means that if Persian Gulf oil cannot be replaced in global supply, oil markets will only achieve that equilibrium position by demand falling in proportion to the lost supply.

Shrinking demand is a popular government response to the oil supply shock catalyzed by temporary loss of access to Persian Gulf oil: Governments around the world are encouraging people to drive less, reduce the use of air-conditioning system, reduce travel, and reduce fuel purchases, among other measures.

Note that measures such as reducing travel and reducing fuel purchases are outright reductions in economic activity. Broadly implemented, they amount to the decision by governments to mandate economic contraction.

With or without government interventions, the IEA’s August Oil Market Report projects that global oil demand will drop by 1.6mbpd this year, a far greater decline than previously forecast. In addition to government inducements and mandates to reduce oil consumption, the price increases which have already occurred in the marketplace will naturally curtail demand—and prices have increased.

Starting from benchmark crude prices as of the last week in February, both Brent Crude and West Texas Intermediate are up between 27% and 31% for October and November delivery over pre-war prices..

We see similar movements for pricing within specific Middle East crudes and blends.

A 30% overall price increase in six months is a steep hike in every economic scenario. Basic economics tells us that, all else being equal, a rise in oil prices will, over time, result in less oil being consumed. Basic economics also tells us that reductions in oil demand is economic contraction by definition.

Just on the basis of the existing price increases for crude oil, the IEA is projecting global oil demand will reduce by 1.6 mbpd.

Global economic projections are likewise being revised downward. In its July World Economic Outlook, the International Monetary Fund lowered its expectations for global economic growth for 3% this year and 3.4% in 2027, a slowdown from the economic growth the IMF reported for 2024 and 2025.

Pipelines Not Enough

With so much economic significance hinging on the status of the Strait of Hormuz, an obvious strategic question emerges: why do Persian Gulf states not send their oil to market via an alternative route?

In fact there are a few pipelines which allow Saudi Arabia and the United Arab Emirates in particular to bypass the Strait of Hormuz for at least some oil production.

Saudi Arabia’s East-West pipeline, terminating at the Red Sea port of Yanbu, has the capacity to move approximately 5mbpd of crude oil to a port not constrained by the Strait of Hormuz. With the Strait effectively closed, Saudi Arabia has been moving as much oil as it can through the pipeline, pushing it to its operational limits.

The UAE has a pipeline which directly bypasses the Strait of Hormuz, the Habshan–Fujairah pipeline, capable of transporting 1.5 mbpd of oil from the UAE’s main production nexus at Habshan on the Persian Gulf to an oil terminal at the port of Fujairah, on the Gulf of Oman.

These are the only two pipelines in the region which have been in production throughout the war.

Iraq has access to pipelines running through Turkey, but that infrastructure had been largely idled in recent years, owing to region’s endemic chaos and instability. Still, in mid-March, soon after Iran closed the Strait of Hormuz, Iraq reached an agreement with Turkey to transport 250,000bpd via the Kirkuk–Ceyhan pipeline to the Turkish port of Ceyhan. Separately, Iraq is preparing to expand access to the pipeline route to Ceyhan by reactivating the Baiji-Fishkhabour pipeline, which has been inactive since 2013 during the height of the ISIS insurgency.

The Kirkuk-Ceyhan pipeline is an extension of pipelines from the Kurdistan region to Ceyhan, which, after several disruptions, resumed moving approximately 240,000bpd in late 2025.

How much actual capacity these pipelines will provide is problematic. The Kirkuk-Ceyhan pipeline was originally built to provide some 1.5mpbd of capacity, but damage to the infrastructure by ISIS and other Islamist militia groups has greatly reduced actual operational capacity. Turkey is getting behind restoring and/or rebuilding the pipelines, however, having expanded the initial transport agreement with Iraq to move a total of 750,000bpd to the Mediterranean port.

These pipelines are making a difference in how much Persian Gulf crude reaches the global market place. As of June the pipelines were transporting the bulk of Persian Gulf oil production, far exceeding the minimal traffic moving through the Strait of Hormuz.

US Treasury Secretary Scott Bessent sees the pipelines as the key to the future of Middle Eastern Oil:

The strait is never going back to the way it was because the Iranians have tried to use it as a choke point. What we are going to see over the next two years, the strait’s going to become irrelevant. It is going to become just another body of water. And I would say that more than 50 or 70 percent of the energy that moves through the strait now is going to go through underground pipelines.

Even if Bessent is correct, however, he is speaking of the long-term, not the present situation or even the short-term situation. It is instructive to note that none of these pipelines as they stand today can carry 100% of their respective countries’ 2025 production volume. In an ideal scenario, the total combined capacity of the Saudi East-West Pipeline, the Habshan–Fujairah pipeline, and the Kirkuk-Ceyhan/Turkey-Kurdistan pipeline network is approximately 8mbpd, while the combined February 2026 production of Saudi Arabia, the United Arab Emirates, and Iraq was approximately 18.61mbpd pre-war.

Even in a best case scenario with the existing pipelines operating at full capacity, restoring pre-war Persian Gulf oil flows requires that nearly 12mbpd of crude move via the Strait.

As Secretary Bessent noted, pipelines are being built, and they will alter the strategic calculus of the Strait of Hormuz when they are completed. At present a number of pipeline projects have been approved and are presumably being “rushed” to completion:

• The UAE is preparing an expansion of the Habshan–Fujairah Pipeline, increasing its capacity to 3.6mbpd.

• Saudi Arabia is expanding the East-West oil pipeline to carry up to 9mbpd.

• Iraq is building out the Basra-Haditha pipeline which, when finished, will deliver up to 2.5 mpbd.

Even when these projects are completed and online, however, they will only offset between 60% and 80% of Persian Gulf oil production. The rest will have to use the Strait.

Why Not Oilpocalypse Now?

Since Persian Gulf oil flows are greatly reduced if not eliminated, the question naturally arises: why has the oilpocalypse not already happened?

The answer is simple: The markets have been consuming commercial and government oil inventories, drawing down oil already bought and paid for.

Starting in late March, the United States began steadily releasing oil from the Strategic Petroleum Reserve, buffering the oil supply shock which emerged when Iran first closed the Strait of Hormuz and precluding market prices from rising too high.

Ironically, US commercial inventories, which were being drawn down as well, have been replenished in recent weeks.

The United States was not the only country to call upon its oil reserves. Other countries have done likewise, with global observed oil inventories dropping below 7.9 billion barrels for the first time in years, suggesting a drawdown rate globally of 2.7mbpd.

A major influence in this has been China’s reserve drawdown. China is believed to have one of the world’s largest petroleum stockpiles, and has presumably been relying on since the war began.

Industry watchers estimate China was drawing down its reserves at a pace of 487,000bpd in May and 940,000bpd in June as a substitute for suddenly pricier imported oil. Some industry analysts project China has literally years of petroleum reserves it can draw down while it waits out the war.

It has been drawing down crude inventories at a rate of around 600,000-700,000 barrels a day since May, Emma Li, an analyst at the energy tracker Vortexa, told Newsweek.

“Even if the drawdown rate accelerates to 1 [million barrels per day], the current 1.2 billion barrels of crude held in above-ground tanks alone would be sufficient to sustain withdrawals for more than three years,” Li said.

Goldman Sachs has a somewhat more conservative estimate, projecting that China’s reserves would support 117 days of pre-war demand.

China’s ability to “wait out” the conflict in the Persian Gulf automatically makes it the likely flashpoint for the next-wave oil supply shock, when strategic reserve releases are exhausted and more oil is purchased on the open market. When China resumes pre-war levels of oil purchases, we will know the world’s strategic petroleum reserves have been drained.

There is no denying that China’s role in postponing a global oilpocalypse has been significant. China has been the world’s largest oil importer, but then reduced its oil imports by 40% almost immediately after Iran closed the Strait.

That reduction in oil-imports—which is to say reduction in oil purchases—has allowed oil markets to find equilibrium prices at much lower levels than if China were still buying oil at previous levels.

As is true of the United States, China is substituting reserves for oil purchased on the open market, easing supply pressures by reducing immediate market demand. If (when?) China resumes purchasing oil on the open market, if there is still a supply deficit, prices will surge dramatically. There is no guesswork in that projection, as that is basic market mechanics at work.

All reserves are necessarily finite. They will eventually either be exhausted or reach a statutory limit which limits their further drawdowns. In either situation, when strategic petroleum reserves are exhausted, the open-market purchases which had been up to then postponed will start to take place.

When buying increases relative to supply, prices rise. When buying increases and supply has decreased, prices will rise relative to the initial pricing state quite a lot.

China’s massive reduction in oil imports tells us that when China resumes prior levels of oil imports, oil prices will surge. That is a scenario which takes from “oilpocalypse maybe” to “oilpocalypse now.”

China Already Experiencing The Oilpocalypse?

Because China’s steep drop in oil imports has played a pivotal role in preventing higher oil prices, the usual bevy of economic “experts” ascribe a measure of market power to China, that China can effectively set global oil prices because of their tremendous reserve stockpile.

China’s massive crude reserves allowed it to adapt its energy policy to insulate itself amid the Iran war. Its flexible demand has had a direct impact on global markets and will dictate swings in this and future oil shocks, according to experts.

The assumption that is being made is that China has acquired the magical ability to turn oil demand on and off like a switch:

This ability to turn oil demand on and off, ostensibly at low economic cost, allows the world’s biggest oil importer to move prices just as the Organisation of the Petroleum Exporting Countries (OPEC) and its allies have long done through their control of half of global output. And as the cartel is weakened by the recent departure of the United Arab Emirates and strained production capacity of its remaining Gulf members, China’s market power is growing. As one oil-trading boss puts it, “China is the new OPEC.”

However, this assumption inverts the market dynamic. China’s influence over global oil prices comes from a decision not to buy—in effect, China’s contribution to global oilpocalypse prevention has been to withdraw from the market. When (not if) China re-enters oil markets and resumes pre-war levels of oil purchases, China will be powerless to prevent the rise in oil prices, and will be powerless to avoid paying those higher prices.

Moreover, the “experts” own analyses reveal that their math does not work out. The most favorable scenarios proposed still have China reducing imports by more than their inventory draws.

Add the 1m b/d no longer being stockpiled and 1.5m b/d in drawdowns, and stock management may account for 2.5m b/d of the 5.5m b/d fall in imports. China could keep this going for another four months before rulers in Beijing started to worry about uncomfortably low stock levels, reckons Emma Li of Vortexa

A closer look at China’s own data confirms that more than just reserve drawdowns are involved in China’s oil import reductions. Refinery output in China has also decreased, and not by a small amount.

Official data showed refinery throughput in June fell 17.7% from a year earlier to 51.24 million metric tons, or about 12.47 MMbpd, which was the lowest since March 2020, during the COVID pandemic.

The throughput drop has deepened every month since the Iran war began, with June throughput posting the sharpest year-on-year decline since at least March 2000, when the National Bureau of Statistics started publishing continuous monthly data.

This is a curious statistic, because a drop in refinery throughput is not a reduction in oil imports in favor of reserves, but outright demand destruction. If China were relying on reserves as a complete buffer against price instability, refinery throughput would have been unaffected.

Year on year, in June China’s refineries saw a 13% drop in capacity utilization, to just 58%. There are few if any plausible economic scenarios where that is not an economic contraction for at least the oil refining industry—and is of a piece with a raft of other economic data showing China’s economy is taking a hit because of war-driven supply chain dislocations.

If China is refining less oil, it is generating less revenue from refined products, and employing fewer people in oil and oil-related industries. Those are inevitable network effects when capacity utilization drops.

The “experts” even confirm this is the case, with the bizarre argument that China’s slashing of domestic oil demand somehow is a market-making flex.

However, ample stocks and restricted exports are not by themselves enough to explain the gargantuan reduction in Chinese imports. The Chinese government also pulled a third lever—curbing domestic demand. In June Chinese refineries processed 2.7m fewer b/d of crude than a year earlier. Production of petrol fell by 14%; output of diesel and jet fuel both shrunk by 21%.

“Curbing domestic demand” is what the Federal Reserve here in the United States calls reducing “revenge spending”. Different bits of word salad to describe the same thing: a deliberate contraction of the domestic economy.

That’s not an oil market flex by China. That’s China choosing oilpocalypse now over oilpocalypse later.

Oilpocalypse When?

The oil supply shock from the disruption of traffic through the Strait of Hormuz is real. The oil supply deficit from that disruption is real.

The buffering impacts of strategic reserve releases is also real.

The mitigating impacts of China dropping its oil imports by 40% is also real.

Given these realities, how inevitable is an “oilpocalypse”? How likely is it that we will see a significant surge in oil prices, an exhaustion of government abilities to buffer oil prices, and forced global demand destruction to push oil markets back into equilibrium?

Because strategic reserve releases are a short-term fix to a long-term supply dislocation, when those reserve releases are exhausted, whether by the US or by China, market oil prices will rise. That is basic market mechanics at work.

The more substantive question is by how much will oil prices rise? Are we facing a future of $200/bbl oil? $150/bbl oil? $130/bbl oil?

The most accurate and honest answer is, at this point, “I don’t know, and nobody else does either.”

China’s reduction in oil refinery output and deliberate contracting of the domestic economy suggests that, when China transitions away from oil inventory drawdowns, its resumption of open-market oil purchases will be less. With less demand there is less pressure to buy. That scenario makes $200/bbl oil less likely and $130/bbl oil more likely.

However, $130/bbl oil would be enough to trigger a significant uptick in consumer price inflation. $130/bbl oil would be enough to push gas and diesel pump prices quite a bit higher. $200/bbl oil would be very bad for the US economy, but that hardly makes $130/bbl good for any economy.

Moreover, whenever the price surge does come—and we must assume that it will come—it will come globally. All countries will be paying more, and paying more at the same time.

The surge in prices will be met with a drop in demand (in China with a further drop).

We do not know when that will happen, but we may be certain that it will happen.

What is uncertain is how big the price surge will be.

Unless the Strait of Hormuz is reopened, there will be an oilpocalypse. Unless the Strait of Hormuz is reopened, there will be stagflation, followed by recession.

Unless the Strait of Hormuz is reopened, the inevitable recession will be a synchronized one.

Can an oil supply crisis be avoided? Short of peace between Iran and the United States, no. That train has left the station.

All that’s left to determine is how big the crash will be when that train finally goes off the rails.

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The July Producer Price Index is running even colder. Month on month deflation persisted, as did year on year disinflation.

The Producer Price Index for final demand was unchanged in July, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices edged down 0.1 percent in June and rose 0.5 percent in May. (See table A.) On an unadjusted basis, the index for final demand increased 4.7 percent for the 12 months ended in July.

At 4.7% year on year, the PPI ran even below Wall Street’s consensus forecast of 4.9%.

As was true with the Consumer Price Index, the PPI once again printed energy price deflation—despite energy prices rising in July.

While the mystery of the disappearing energy price inflation remains, beyond energy prices the July PPI report showed disinflation and deflation across the board. Despite an ongoing war, with all the inflationary pressures war usually brings, factory gate prices in the US economy cooled in July.

Broad-based disinflation and deflation in the July PPI could be a warning signal of a cooling economy, perhaps one slipping towards recession and contraction.

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Headline Deflation, Core Disinflation

While the year on year headline producer price inflation rate showed unexpected disinflation, month on month the headline rate printed outright deflation.

Month on month, the core PPI showed significant disinflation, dropping from just under 0.4% to just over 0.2%.

Consistent with the month on month numbers, the year on year inflation rate showed greater decline at the headline value than at the core level.

The index itself also drives the point home: inflationary pressures on producer prices eased significantly in July.

That the PPI showed deflation for the second consecutive month its another warning signal of growing weakness in the US economy.

When we recall that the most recent GDP estimate showed real economic growth slowing significantly over the past two quarters. the PPI signaling economic weakness is an alarm we should not ignore.

While the lack of energy price inflation is as counterintuitive for the PPI data as for the CPI data, beyond energy there simply are not many inflationary pressures in the US economy at present.

Energy Prices Declined?

As with the Consumer Price Index, the one counterintuitive number in the report was the energy price inflation data. Despite a month of rising energy prices, the energy price index showed energy prices falling for the second consecutive month.

However, that there was only disinflation for unprocessed fuels as opposed to outright deflation for processed energy goods may confirm that recent energy price increases simply have not percolated through to the indices yet.

While we might have expected a higher intermediate demand inflation print for unprocessed fuels (i.e., crude oil), that same expectation makes the deflation in processed energy goods (i.e., gasoline) that much more remarkable.

As we noted with the CPI, RBOB Gasoline futures rose 15% in July.

Deflation among oil’s refined products should be coming from market prices falling.

Market prices for oil’s refined products are not falling. Retail prices for fuels also did not fall in July.

As with the CPI, for whatever reason July’s market energy price hikes did not make it into the PPI report.

Food Prices Fell Again

One welcome bit of producer price deflation came in the Food subindex, which showed deflation for a second consecutive month.

Additionally, fertilizer prices also showed deflation for July.

Fertilizers, particularly nitrogenous ones, experienced significant inflation during April and May. Today’s fertilizer prices are tomorrow’s food price inflation factors, making any unwinding of fertilizer price increases a positive development for future food prices.

Goods Prices Cooled For Both Final And Intermediate Demand

While the lack of energy price inflation is a counterintuitive conundrum, goods prices overall could be signalling a lack of inflationary pressure for the next few months.

Within final demand, goods prices printed deflation for the second consecutive month, consistent with overall final demand.

We should note that intermediate demand also printed deflation in all stages except Stage 4, again for the second consecutive month.

The pipeline for future goods output is not presenting with any clear inflationary pressures, and that indicates lower final demand goods price prints for the coming months.

Outside of the possibility of higher energy prices from a potential resurgent oil supply shock, the PPI data is not showing many inflationary pressures particularly for goods, and even services printed disinflation for the month.

Barring that possible reversal in energy price inflation (which is possible given the apparent unreported July price rises in energy commodities), there simply are no rising price trends within the Producer Price Index at this time.

No Inflation Anywhere

If we proceed from the conventional presumption that the Producer Price Index is the leading indicator for the Consumer Price Index, we are seeing indications of lower inflation expectations heading into the fall and possibly beyond.

Arguably, we should be seeing inflationary pressures in energy, and it remains likely that we will see energy price inflation in August and September, as the market price increases notched in July percolate through to the PPI and CPI. Outside of energy, however, no inflationary pressures are making their presence known.

With “affordability” sure to be a campaign theme for mid-term election races around the country, a near-complete lack of obvious inflationary pressures is likely to prove a boon for Republicans and a burden for Democrats. The possibility of an “oilpocalypse” of surging oil prices from the stalemate with Iran over the Strait of Hormuz, leading to global stagnation, global demand destruction, and eventually a global recession, is the only significant potential inflationary pressure visible in the price index data at present.

If President Trump can avoid the oilpocalypse, inflation could be effectively pulled off the table as a potential campaign issue for the general election cycle. It will be hard for Democrats to make a campaign issue out of prices if inflation keeps trending down.

If.

The big question mark remains the oilpocalypse. At present, neither the US nor Iran is inclined to make any concessions in order to secure even a temporary ceasefire. As a result, the Strait of Hormuz remains effectively closed as of this writing, and may very well remain closed for the foreseeable future.

Closing the Strait means global oil supplies are significantly reduced. While strategic reserve releases have buffered the obvious oil price hikes global oil markets have seen since the start of Operation Epic Fury, those releases cannot go on forever, and it is becoming increasingly probable the Strait’s closure will last longer than strategic reserve releases can be sustained. When that buffer is at last exhausted, oil prices are likely to move in only one direction—up.

In the worst case scenario, that of the oilpocalypse, not only do energy prices surge, but the increase in fuel prices and thus transportation and logistics costs also creates inflationary pressures on other goods as well.

In the best case scenario, the lack of inflationary pressures to either push prices up or keep them up suggests that consumer price inflation may yet come back down to 2% or less year on year—the “Holy Grail” for the Federal Reserve, and presumably the key question for when the Fed decides what to do about interest rates each month.

Which scenario we get hinges entirely on the outcome of the United States’ war with Iran. Recent news reports suggest both Iran and the US are anticipating an extended attritional conflict. An extended conflict means the Strait of Hormuz will remain closed for the foreseeable future. An extended conflict almost certainly means the oilpocalypse will happen.

If the oilpocalypse does not happen, there are no other obvious inflationary pressures showing up in the price index data to drive consumer or producer prices higher over the coming months.

This could be a positive development, as it means inflation will not heat up. However, as noted earlier, a lack of inflationary pressures can also be a lack of economic growth pressures. The same rising demand which tends to push prices up is the same rising demand which tends to push the economy to expand. Lack of producer price inflation or consumer price inflation could mean a lack of economic growth and a continuation of the cooling GDP growth figures reported for the first half of the year.

On the surface the PPI report looks good—prices came down. If prices came down because the economy is slowing down, the PPI report is a warning signal of greater concerns than just rising energy costs.

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The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.1 percent on a seasonally adjusted basis in July after falling 0.4 percent in June, 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 numbers were exactly where Wall Street expected them to be.

The numbers were right on target as projected by the Cleveland Fed’s inflation nowcast.

Perversely, while there was no surprise in the headline number, the cooling headline and core inflation numbers are counterintuitive.

Driving the headline disinflation figure was continued energy price deflation, a carryover from June. That is remarkable, considering, as I noted the other day, energy commodities all rose.

• Brent Crude: ~24%

• West Texas Intermediate: ~20%

• Diesel (NY Harbor Contract): 32%

• RBOB Gasoline: 15%

• Gas price at the pump: 6%

• Diesel price at the pump: 13%

Energy prices rose in July—a lot. It’s just the energy price index that fell.

If these energy prices did not percolate through to the Energy Price Index for July, they are going to percolate through eventually. They will come in August (most likely) or in September at the latest, but they will come.

Meanwhile, the inflationary impact from prior energy price hikes on other parts of the CPI remains muddled. Durable goods surged, and so did Services, but the rest of the CPI showed either deflation or disinflation.

There has been no stagflationary crisis from the first wave of the oil supply shock. What happens with prices should the second wave—the “oilpocalypse”—actually unfold is a story yet to be told.

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No Headline Deflation This Month, But Significant Disinflation

I said last month that June would be a one-off, and that we would not see deflation repeated at the headline level in July. In that regard, my assessment was accurate.

However, year on year inflation still cooled dramatically from June, by more than I anticipated.

With rising energy prices, that July saw the needed energy price deflation to bring the headline and core inflation rates down significantly is extremely remarkable—which suggests there may be some missing data to help make it make sense.

Even month on month inflation was much cooler than market energy prices indicated.

While energy price deflation remains the improbable consumer price metric for July, the larger picture is still that there are not many other inflationary pressures within the US economy.

Consumers always prefer lower prices to higher prices, but the economic reality of expansion is that increased demand necessarily creates inflationary pressures. Similarly, a lack of inflationary pressures suggests that demand is not actually increasing all that much, which would imply the economy has not grown all that much.

That lack of growth is somewhat confirmed by the cooling trend we have seen in the BEA’s Real GDP figures for the past two quarters.

How much of July’s counterintuitive disinflation is the result of a cooling economy? Probably more than economists want to admit.

More Energy Price Deflation?

My prediction for the Energy portion of the CPI was completely refuted by the CPI data. Instead of seeing a return to energy price inflation (and potentially significant energy price inflation), for July we were presented with additional energy price deflation.

I also did not expect that deflation to be fairly broad-based, yet July saw prices drop for most components of the Energy subindex.

Yet despite what the CPI data says, the futures price for both Brent Crude and West Texas Intermediate (October contract) rose in July.

While June saw oil prices trend down throughout the month, that trend reversed almost immediately in July.

Even though oil prices rose throughout the month, the July CPI data is effectively processing only June market data.

Diesel September contract prices also rose since very nearly the beginning of July.

The same holds true for RBOB Gasoline September Contract Prices

Even fuel prices at the pump rose throughout the month.

Energy prices rose throughout July, yet none of those price increase appeared in the July Consumer Price Index?

When we recall that March, April and May energy price increases were largely reflected in March, April, and May, that July would have delayed effect appears even more improbable—yet that is what the CPI data says transpired for energy prices in July.

Food Price Inflation Cooled

One clear bright spot in the CPI data was the disinflation for food prices for July.

April has seen a sharp increase in food price inflation, but since then a general cooling trend has prevailed for the Food subindex.

Nondurable goods were another welcome bit of news, printing deflation again in July.

Energy prices are, as has been noted before, a major factor in the nondurable goods deflation.

Outside of energy prices, the CPI data reports for July there are literally no inflationary pressures evident among nondurable goods.

Some Inflation Did Increase

Some components did show inflation getting a bit hotter, however.

Durable goods printed significantly higher inflation month on month for July.

Services also posted significantly higher inflation month on month.

Unlike with Durable Goods, however, the rise in Service price inflation represents more of a reversion to mean after an outlier drop in Service prices for June. Relative to May, Service price inflation has still cooled somewhat overall.

Shelter prices per the CPI data printed marginally higher inflation for July than for June.

In some regards, this is unsurprising. The BLS data on rents and housing tends to be more backward-looking than forward-looking. When we look at the more forward-looking Zillow Observed Rent Index (ZORI), we see shelter price inflation cooling in July.

While some subindices are printing hotter inflation for July, none of them are printing enough inflation to make a significant dent in July’s energy price deflation.

Not Much Inflation Beyond Energy

If we step back and look at the major subindices side by side, we quickly see that energy is the only component which posted significant price increases year over year. Indexing the CPI components to January 2025, there is almost no significant upward movement in the CPI data except for energy.

Nondurables shows some increase as a result of Operation Epic Fury, but this is unquestionably also the result of energy prices—which are a part of nondurable goods. Food and services have not seen any appreciable impact attributable to the oil supply shock coming out of the Persian Gulf.

We do not see any real inflationary pressures when we zoom out and use January 2021 as the index baseline.

While food and services have shown steady increases since the 2022 hyperinflation cycle, nondurable goods had plateaued before the oil supply shock pushed up nondurable goods prices starting in March.

Durable goods have been in long-term deflation since the hyperinflation cycle, and July’s sudden inflation spike is not large enough to appreciably shift that curve up.

Once again, the lack of inflation even long-term for nondurable goods is yet more confirmation of a cooling economy.

When Will We See The Inflation?

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.”

As the Strategic Petroleum Reserve nears its statutory floor, if the Strait of Hormuz remains closed to maritime traffic, losing the buffering effects of SPR releases will push energy prices quite a bit higher. We may yet see Brent Crude move back north of $100/bbl. Without the SPR as a price buffer, $135/bbl would not be an unrealistic threshold for Brent Crude to cross in a stagflationary oilpocalypse scenario.

Will the oilpocalypse happen? We are not going to know the answer to that until it does happen.

What we know now is that oil production within the Persian Gulf is down significantly from pre-war levels, and tanker traffic in the Strait of Hormuz is nonexistent. What we know now is that global oil supply is being reduced; when strategic reserve releases end global supply is likely to be reduced further.

If the Strait remains closed, and Persian Gulf oil remains not on the market, sustained higher prices will result. How much higher oil prices go will decide how damaging the oilpocalypse ultimately will be.

Whether from the oilpocalypse or just from prices finally percolating through to the CPI data set, market price hikes such as we saw in July for energy commodities will show up in energy price inflation. Energy price inflation is going to happen before too long.

The expectation had been that it would happen in July. While that expectation has been pushed back to August, or perhaps September, it will happen.

When it does happen—or, rather, as it happens—there is sure to be a suppressive effect on the overall economy. As is invariably the case with all supply shocks, any sharp reduction in supply necessitates a drop in demand before market equilibrium can be restored.

That is the other economic shoe we are waiting to see drop—the appearance of demand destruction as markets rebalance to absorb a major oil supply shock.

So far the oil supply shock has been largely minimized. When the mitigations of strategic petroleum reserve releases run their course, and the Strait of Hormuz is still closed, that is when we will experience the full force of what no oil through the Strait really means.

The question of the moment is when will we see rising energy prices reflected in the CPI? The more pressing question is when will demand destruction set in, as the oilpocalypse unfolds across the world’s economies?

The answer to both questions is likely to be “soon.”

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Both nonfarm payroll employment (-23,000) and the unemployment rate (4.1 percent) changed little in July, the U.S. Bureau of Labor Statistics reported today. Employment declined in local government education and retail trade. Employment continued to trend up in health care.

Apparently, the Bureau of Labored Statistics has outsourced their press releases to the bastard stepchild of ChatGPT. Describing a drop of 23,000 jobs as nonfarm payroll employment as having “changed little” the sort of psychedelic hallucination we have come to expect of AI slop. Meanwhile, in the real world, we recognize a sudden loss of 23,000 jobs across all US job markets as a pretty ginormous deal.

A loss of 23,000 jobs puts the July jobs report a full 100,000 jobs below where Wall Street expected the report to be.

Exactly why Wall Street had such high hopes is a mystery. Both the June JOLTS Report and the July ADP National Employment Report signaled a weakening job market.

When we unpack the details of the July BLS data, we quickly see one grim reality emerge: The JOLTS and ADP signals were not wrong. US labor markets have softened significantly in recent months.

The US lost jobs in July. That’s never a good thing.

If this is not a return to jobs recession, it is uncomfortably close to it.

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Government Job Loss Is The Reason Headline Figure Was Negative

A loss of 23,000 jobs is a shocking headline statistic, and makes for quite the shocking headline. Certainly corporate media had little hesitation about pushing that exact headline:

Even alternative media outlets such as ZeroHedge and The Epoch Times highlighted that negative headline number.

However, we should note that government employment dropped by 53,000 jobs in July, mostly at the local government level.

When we look at just private non-farm employment (which is the same filter used by ADP), the job tally for July is a positive 30,000 jobs.

30,000 jobs created is a figure with less suckage than 23,000 jobs lost, but it is still a far cry from a great jobs number. it is also a far cry from what Wall Street was anticipating.

The private sector fared better than the economy overall, but not much better.

June JOLTS Was Again Right About Downward Revisions

That government jobs were the sole reason for the negative headline number was the good news for the July report. The most glaring piece of bad news was that the June JOLTS figure once again correctly anticipated major downward revisions, as the revisions reported on the July report wiped out more than half the jobs reported in May and June.

The change in total nonfarm payroll employment for May was revised down by 66,000, from +129,000 to +63,000, and the change for June was revised down by 37,000, from +57,000 to +20,000. With these revisions, employment in May and June combined is 103,000 lower than previously reported.

The size of the revisions dwarfs the private payroll jobs reported in July. The robust job reports that heralded the end of the jobs recession have now been largely walked back, and the overall magnitude of revisions for 2026 now sits at 111,000 jobs lost.

When we index the BLS Establishment Survey data, the BLS Household Survey data, and the ADP data, we may safely conclude that Lou Costello Labor Math is still the driving force behind the BLS monthly job reports.

The BLS has yet to even acknowledge the widening variance between payroll employment and the overall employment level, let alone account for it. Until it does, the headline numbers especially should be taken with several very large grains of salt.

And Manufacturing?

As longtime readers know, I put particular emphasis on the Manufacturing jobs numbers. In my view, President Trump cannot achieve his Agenda 47 goal of making the US a manufacturing superpower without greatly expanding manufacturing employment.

Unfortunately, manufacturing job growth dropped by more than 50% in July, to less than 5,000 jobs.

However, that less-than-glorious aggregate manufacturing job total did not stop John Carney at Breitbart from posturing about how well manufacturing was doing, by focusing on the durable goods jobs numbers.

But the headline loss concealed impressive strength in durable goods manufacturing. Payrolls at durable goods factories climbed by 18,000 in July, following a 12,000 job gain in June and a 14,000 job gain in May. Both the June and July numbers were significantly revised up, meaning the sector was even stronger than we thought.

However, what gets overlooked in that perspective is the steady hemorrhaging of nondurable goods jobs since late last fall.

The durable goods job growth is indeed significant, and job growth in that sector is very much a good thing. However, much of that growth is merely an offset to job loss among non-durable goods over that same period. There might be some overall advantages to shifting from nondurable goods to durable goods employment, but expanding both, or expanding durable goods jobs without sacrificing nondurable goods jobs, would undoubtedly be even more advantageous.

More Goods-Producing Jobs Than Service Jobs, But Weaker Growth

No amount of spin by Breibart or any other media outlet can hide the reality that the Employment Situation Summary has been charting a weakening labor market over the past few months. Goods-producing jobs outpaced service-sector jobs for July, but both classes of employment are at far lower job growth levels than in March.

Across the board, job sectors are either shedding jobs or posting weaker growth than just a few months ago.

Notably, for the second month in a row, the Leisure sector has shed the most jobs by far in the private sector.

Whether this is the result of the ending of temporary jobs supporting World Cup venues or the result of inflation eating into leisure and recreation budgets is uncertain. What is certain is that, over the past two months, Leisure has lost over 80,000 jobs.

When viewed sector by sector, there just are not a lot of bright spots in the July data. Construction and Information posted growth gains, while every other sector posted job loss or weaker job growth.

Wages Are Still Lagging

Weekly earnings were another disappointment in the July jobs report. While we will not have the July inflation figures for another couple days yet, it is clear from the earnings data we have for July that weekly earnings overall still have not caught up with inflation from 2021.

We should note that wage growth has, overall, outpaced inflation growth since January 2025, but even at that, it appears wage growth slowed in July.

As the threat of the oilpocalypse draws ever closer to becoming reality, now is not the time for wage growth to be slowing. If the full force of an oil supply shock from an extended closure of the Strait of Hormuz crashes across the world’s economies, American workers will need every penny of wage growth they can get ahead of that to weather the stagflationary storm which is sure to follow.

Right now, American workers are not seeing that wage growth.

Unemployment Rates Are Down

One bright spot in the July jobs data: unemployment levels are genuinely down.

The number of unemployed as well as the number not in the labor force but who want a job now dropped significantly in July, the second consecutive month both metrics decreased in the same month.

These are welcome declines, and they translate into not just the official unemployment rate, but also the “real” unemployment rate (the unemployment rate with those not in the labor force but who want a job now included) declining.

This much, at least, is a healthy macroeconomic trend for labor.

One important caveat, however, is that the number of potential workers not in the labor force rose yet again in July.

As we can see from the continued decline in the overall employment level, most workers who are no longer unemployed have simply left the labor force altogether.

These declines add up to a very disturbing statistic: the U.S. Civilian Labor Force has declined by over 2 million since last November.

It is difficult, if not impossible, to have sustainable growth in any economy with a shrinking labor force. Right now the United States has a shrinking labor force.

A Return To Jobs Recession?

Given the poor data quality inherent in the BLS Employment Situation Summary, we must be as cautious in calling the latest job metrics a return to the jobs recession as we were in concluding a jobs recovery is under way. even with the revisions, the US has still only had poor jobs performances for the past two or three months. The trends over those three months are disconcerting, and if they persist then we will be in another jobs recession, but just as we have seen a sudden reversal from the high growth just in March, we may yet see the same reversal back to the upside in coming months.

The data gives no indication that this is what will happen, but prior months also tell us that it can happen.

Regardless of what the payroll data reports, however, it is mathematically certain there will be no long-term jobs recovery if there is no long-term growth in either the employment level or the labor force level. We may not be in a jobs recession yet, but without growth within the civilian labor force, we soon will be.

These reversals in US labor markets could not have come at a worse time. As energy prices continue to apply inflationary pressure not just on the US economy but on every economy, a weakening labor market increases the likelihood the looming oilpocalypse will translate into a stagflationary shock of increasing magnitude. As overall employment declines, there is less labor to buffer higher prices. Whatever inflationary impacts we see in the economy emanating from the Persian Gulf, those impacts are made considerably worse when employment levels are down and unemployment levels are up.

There is no way to know with certainty how the situation in the Persian Gulf will unfold. The Strait of Hormuz could be reopened this week—or it could remain closed for several months. Right now, both scenarios are feasible.

Once the Strait does reopen (and, long-term, it almost certainly will), oil prices are sure to stabilize fairly quickly. If that happens, the inflationary pressures on the US economy will be significantly eased. We could even see a resurgence of the Civilian Labor Force and unemployment level metrics.

We are not (yet) backsliding into jobs recession.

We are, however, dangerously close to doing exactly that.

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ADP’s Chief Economist Nela Richardson tried to shift the focus away from the job numbers and towards wage growth.

Job-changers are highly sensitive to real-time economic conditions, and their rapid pay growth implies supply constraints in parts of the labor market. Typical hiring patterns, meanwhile, are changing as employers react to shifting macro-economic conditions.

Wage growth is important, but wage growth is of limited utility in the entire economy if there is not also job growth. The month of July is coming up a little bit short on job growth.

When I say “a little bit short”, I mean 26,000 jobs short of Wall Street’s consensus estimate.

When I say “a little bit short”, I mean 46,000 jobs short of the Trading Economics Forecast.

Yesterday I discussed the JOLTS data, and the prognosis it was signalling an end to the jobs recovery, a return to jobs recession. With the ADP July data, that outcome became that much more probable.

July was expected to be another good month for jobs.

Expectations have not been met.

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There Was Growth, Just Not Much Growth

The July numbers are especially disappointing, as it was just two months ago, in the May data, that job growth appeared to be starting to accelerate. The July ADP data does not do much to sustain that trend.

Yet just as the May data showed broad growth across virtually all sectors, by July the sector-level data had softened considerably.

While healthcare remained strong, job growth in other sectors slowed, with first one sector in June then three sectors in July showing job loss. Even healthcare job growth has slowed considerably since May’s upbeat job report.

Perhaps more ominously, as the table above reminds us, the Wall Street consensus estimate for the ADP numbers in June was 15,000 jobs too high.

Even with July’s more conservative estimate, the final ADP numbers were well below that, by 26,000 jobs. Job markets appear to be slowing down faster than Wall Street has projected.

That is not a good trend for jobs in this country.

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Goods Producing Sectors Suffered

One disquieting aspect of the July data is that it shows goods producing sectors losing jobs, while service sector job growth has cooled significantly since May.

Fortunately, Manufacturing managed to show job growth, albeit a slower growth pace than before.

After sixteen months of job loss, job growth in Manufacturing is a welcome sight, even if it has slowed down.

Construction job growth also remained positive—barely.

Since peaking in March of this year, construction job growth has all but disappeared.

Resource extraction and Mining were the goods producing jobs where the job losses have been materializing.

Mining was the one sector with job loss in May, and the job loss has only worsened since then.

In every context and dimension, job growth among goods-producing jobs has been slowing, and in July it really slowed.

Service Sector Jobs Fared Somewhat Better

While Service Sector job growth has been slowing as well since May, most service sectors fared better than goods-producing sectors.

Education and Healthcare remained the main engine of job growth in the economy.

Finance was another sector where job growth only slowed a little.

While Information has been a weak contributor to job growth for some time, in July it was at least not that much weaker a contributor to job growth.

Professional and Business Services were the one sector where job growth actually increased in July, although not by much.

Trade, Transportation, and Utilities, long a source of higher paying service sector jobs, slipped into job loss for July.

In another grim confirmation of the June JOLTS data, Leisure was the biggest source of job loss in July.

With the exception of Professional and Business Services, every sector in the ADP data set posted either larger job loss or weaker job growth than in June. July was a slowdown across the board.

PMI Data Sends Conflicting Signals

The ADP data is clearly printing a slowdown in job growth, and perhaps even heralding a return to jobs recession. Muddying the waters, however, are the July Purchasing Managers' Index metrics, which present a conflicting counter-narrative to the ADP data.

The ISM Manufacturing PMI printed major expansion in July at 55.6 (50+ is expansion, below 50 is contraction).

The ISM Services PMI printed a cooler but still strong 54.

The ISM Manufacturing Employment Index also had a strong print 52.8, surging out of June’s contraction well into expansion territory.

Yet the ISM Services Employment Index plunged into contraction at 47.4.

According to the ISM data, Manufacturing was the strong performer for July, and Services the weaker—the exact opposite of what the ADP data reports. Yet among Services at least the two data sets agreed that job growth weakened in July.

The PMI data suggests that, for now at least, claiming a return to jobs recession is premature. If job growth numbers remain dismal, however, a return to jobs recession is inevitable, regardless of what the PMI data shows.

Not Jobs Recession…Yet

The ADP jobs report is, to say the very least, a disappointment. Certainly Wall Street had much higher hopes.

The ADP jobs report is also a confirmation that the weaknesses signaled in the June JOLTS report were not outliers.

Both reports show Leisure taking a sizable jobs hit.

Both reports show overall job growth having slowed considerably from just two months ago.

Yet the ADP data only shows three sectors with job loss, which is a better result than the JOLTS report. While all sectors cooled in July, the ADP print was still stronger than the June JOLTS print.

While ADP confirms that the warning signals in the JOLTS data are real, ADP also printed strong enough that we cannot say the US economy has slipped back into jobs recession—at least, not yet.

The ADP reports have been showing cooler job growth trends over the past two months. If that trend continues, we will be back in a jobs recession, and sooner rather than later. For July at least, however, we are not yet there.

The PMI data suggests we might not actually get there. With both Manufacturing and Services printing expansion for July, sector growth eventually will compel job growth. If the PMI data continues to print expansion, eventually job growth must occur across the board.

Regardless of what the longer-term outlook for job growth might be, however, the weak ADP numbers, coupled with the dismal June JOLTS numbers, tells us not to expect much out of the BLS Employment Situation Summary due out on Friday. With two independent data sources charting a slowdown in job growth, there is simply no foundation for having much optimism for the BLS jobs data.

The July ADP jobs report is not a good jobs report. It is a warning sign the July BLS jobs report will very likely be itself a fairly dismal affair.

The jobs recovery, and job growth overall in this country, are slowing down. Those are not encouraging trends.

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The number of job openings was little changed at 7.4 million in June, the U.S. Bureau of Labor Statistics reported today. Hires were unchanged at 5.3 million, while total separations changed little at 5.4 million. Within separations, quits (3.2 million) and layoffs and discharges (1.8 million) were unchanged.

In fact, the job openings number upon which Wall Street remains eternally and inexplicably hyperfocused, declined in June, falling well short of Wall Street expectations.

Hiring and separations both rose in June, and effectively negated each other.

Overall, the June JOLTS data shows job growth in this country was a lot less robust that month than the earlier ADP and ESS reports had sown—so much less robust that we should not be surprised to learn that, when the July Employment Situation Summary comes out on Friday, the May and June ESS data sets are revised significantly downward.

Is the jobs recovery at an end? Did the jobs recovery ever really get started? The takeaway from the June JOLTS report is a disturbing answer to both questions: “Possibly.”

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Advance Warning Of Lou Costello Labor Math?

While the media remains fixated on the mostly irrelevant job openings number within the JOLTS report, the far more consequential hiring and separations numbers show that net hiring was effectively zero for the month of June.

Job openings declined by 178,000, the second consecutive monthly decline. Hiring rose by 96,000, and separations rose by 91,000. Overall, total nonfarm net hiring fell by 3,000, and total private net hiring rose by 5,000, meaning the JOLTS data is telling us there was almost no job growth in this country in June.

That outcome, of course, is very much at odds with the June Employment Situation Summary, which reported total nonfarm job growth of 57,000 jobs—at least for now. We should not be surprised if that number is revised sharply downward when the July jobs report comes out. In most sectors, the June JOLTS report shows much less job growth than the June ESS data.

The JOLTS report was far less glowing in May than the ESS report, and June saw significant downward revisions.

The JOLTS report is far less glowing for June than the ESS report, so we should expect more significant downward revisions.

Lou Costello Labor Math lives on at the BLS.

Manufacturing Held Its Own

One encouraging note in the June JOLTS data: Manufacturing net hiring rebounded after losing ground in May.

Not only was Manufacturing net hiring positive for June, it outperformed the ESS data by a wide margin.

Construction also rebounded in June, although June JOLTS was again more pessismistic than the June ESS data.

Professional and Business Services also held its own for the month. Although June net hiring eased somewhat, the June JOLTS data remained ahead of the June ESS data.

Trade, Transportation, and Utilities was the other sector that did well on the June JOLTS.

While Healthcare job growth rebounded per the June JOLTS data after May, it still lagged behind the June ESS.

While all of these sectors reported job growth, Leisure manage to wipe out most of that job growth in the aggregate.

Leisure Loses Bigly

According to the JOLTS data, the Leisure and Hospitality sector lost even more jobs in June than was reported by the ESS.

Leisure hemorrhaged jobs in June, and outpaced the decline per the ESS, meaning we should anticipate the July jobs report revising the June Leisure numbers significantly further down.

Meanwhile, the 123,000 Leisure jobs lost per the JOLTS report all but wiped out the job growth in other sectors. Despite the job gains in Manufacturing and Construction, total net hiring in the private sector was just 5,000.

Across all nonfarm sectors, total net hiring showed a loss of 3,000 jobs.

The difference between the two is arguably a “good-bad” news scenario: Government also shed jobs according to the June JOLTS report.

In most sectors job loss is cause for concern. When the sector is government, a little job loss will be for many people cause for celebration, as it means the government got that much smaller.

However, the job losses in Leisure within the JOLTS data indicates that job growth, rather than just cooling steadily since March, collapsed outright after April.

If the JOLTS data is a more accurate snapshot of US job markets than the Employment Situation Summary, we have not had any job growth since April.

Jobs Recovery Or Jobs Recession?

The June JOLTS data does not show robust job growth. The June JOLTS data shows US labor markets more volatile than in May, but without any job growth to make up for the increased volatility.

The June JOLTS report is considerably more pessimistic than the June jobs report. If we looked at the JOLTS data exclusively, we would have to conclude we have slid back into a jobs recession. That several job sectors show weaker job growth within the JOLTS data than within the ESS data arguably means we are flirting with a return to a jobs recession even with the positive Employment Situation Summary data.

That is doubly a cause for concern, because if job growth weakens at the same time the oil supply shock from the war with Iran causes a fresh surge in oil prices, the United States might quickly find itself in the throes of 1970s-style stagflation. With the war cycling almost weekly between ceasefire and escalation, that “oilpocalypse” scenario remains very much a possibility, and increasingly a probability.

If US job markets remain robust, showing good growth month after month, the US economy will find it easier to weather the economic storm of a severe oil supply shock. Based on the jobs reports of the past few months, there was reason to hope the US might have the economic resilience to shake off the worst effects of the oilpocalypse.

The June JOLTS report suggests that hope might have been in vain all along. Not only does the oilpocalypse beckon, jobs recession may be signaling its return, and that means stagflation could be preparing to make its entrance sometime in the next few months.

The future outcomes indicated by the June JOLTS report do not look at all encouraging.

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Now, in the June Personal Income and Outlays Report we have seeming confirmation of the CPI print of outright deflation, with all categories showing at least disinflation month on month, and several in outright consumer price deflation.

From the preceding month, the PCE price index for June decreased 0.1 percent. Excluding food and energy, the PCE price index increased 0.1 percent.

From the same month one year ago, the PCE price index for June increased 3.7 percent. Excluding food and energy, the PCE price index increased 3.3 percent from one year ago.

Unlike with the Consumer Price Index, the PCE Price Index (PCEPI) was right in line with expectations. Both Wall Street and the Trading Economics forecast guessed correctly for the year on year inflation rate.

Even the Cleveland Fed’s inflation nowcast matched the final PCEPI inflation print.

Is the June PCEPI report a confirmation that inflation has peaked, and that inflation will not rise uncontrollably in the future? If everything had stayed as it was in June, that would have been a realistic read on the data.

With the war with Iran heating back up, and with the Strait of Hormuz once again being contested, it is already virtually certain inflation will return for July, and if a fresh oil supply shock develops, stagflation is still a very real hazard.

June will prove to be just a pause for inflation returns, and the risks of stagflation grow.

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Headline Inflation A Repeat Of CPI Print

The immediate takeaway from the headline inflation numbers for the PCE Price Index is that they are essentially a repeat of the June CPI data: deflation month on month, and disinflation year on year, are very much the order of the day.

Year on year, PCEPI headline inflation dropped from 4.1% to 3.7%.

Core inflation dropped from 3.4% to 3.3%

Month on month, the headline PCE Price Index printed outright deflation, dropping from 0.5% to -0.1% from May to June.

The core index still showed some inflation, but printed a healthy 0.2% decline month on month, to 0.13%, the lowest month on month core inflation print since March 2025.

There is no denying that the headline numbers, just as with the Consumer Price Index, are exactly what consumers want to see, and show prices moving in the right direction.

Even drilling into the details underneath, the data continued to show healthy downward price movements.

Energy Down, Food Up

Just as with the CPI print, deflation was not quite universal. Some price sectors still printed positive inflation rates, albeit lower rates in most cases.

Just as with the CPI, the month on month energy price inflation rate was negative, printing a steep -5.9% decline just for the month of June.

Nor is there any great mystery as to why energy prices printed deflation for the month: Benchmark oil prices dropped significantly, with the September contract for Brent Crude dropping $18/bbl, to $73.19/bbl by the end of the month, and West Texas Intermediate dropping to $69.34/bbl.

The spread between the September and October contracts all but vanished, with the spread between Brent and West Texas Intermediate narrowing as well.

Refined products trended down as well, with RBOB Gasoline dropping $0.18/gal, to $2.75/gal for the September contract.

Prices at the pump fell throughout the month, based on Energy Information Administration data.

June was definitely a month when peace prospects in the Middle East translated into steep declines in energy prices, steep enough to cool the entire PCE Price Index.

The news was not universally good, however, as food was the notable exception to the deflationary/disinflationary trend for the month.

After flirting with food price deflation for May with a 0.06% month on month print, food prices rebounded, with the inflation rate rising in June to 0.25% month on month.

It grew cheaper to fill your gas tank in June, but it grew more expensive to fill your belly.

However, over the longer time frame, food prices are not destabilizing. Despite the month on month fluctuations, year on year food price inflation has been hovering just below 2.5% since September of last year.

Durable Goods Almost Unchanged, Non Durable Goods Sharply Down

While durable goods did not repeat its deflationary performance from May, it only barely printed actual inflation, registering a barely perceptible 0.02% month on month.

Nondurable goods printed the most deflation, falling nearly a percentage point on the month. While service price inflation rose on the month, at 0.13% services inflation rate is the lowest since the start of the Trump Administration 2.0.

The drop in nondurable goods prices was, of course, almost entirely due to the drop in energy prices.

Yet while prices were down, consumption was not. Real spending on durable and nondurable goods actually rose in June.

Only real spending on services declined marginally month on month.

This is particularly encouraging, as it means the drop in prices is not due to declining demand, but to expanded supply. It is also further confirmation that the energy price inflation from the spring months never spilled over into other areas.

Even AI Could Not Drive Inflation In June

It is worth noting also that the AI inflation fear from May did not carry over into June, as the index of computer hardware prices declined.

One month does not make a trend, of course, but one month does disrupt an existing trend. In this case, the index for computer hardware prices ended its increase that began in December of last year.

Does this mean the AI boom has peaked, and Wall Street’s AI bubble is soon to burst? One month’s change will not answer that question, but easing hardware prices means either supply of memory chips, et cetera, has expanded or demand eased in June.

The former would be a very positive sign of economic growth. The latter could be a warning sign that Wall Street’s AI bubble is indeed bursting or about to burst, with all the ramifications for equities that attend upon a ruptured asset bubble.

It Will Not Last

The June PCEPI print is undoubtedly good news. It will not be repeated in July.

We know this because we have seen a month’s worth of news headlines about the collapse of the Memorandum of Understanding between the US and Iran.

We know this because traffic in the Strait of Hormuz has collapsed yet again.

We know this because oil prices, after falling in June, rose sharply again in July.

We do not yet know how these will register on the July Consumer Price Index Summary or the July Personal Income and Outlays Report—the July CPI print will not be read for another twelve days—but basic economics tells us which direction the movements will be. Energy prices will rise, energy price inflation is sure to rise, and that means headline consumer price inflation is also likely to rise.

With oil prices having recovered nearly all the pricing surrendered in June, unless there is a new ceasefire and a return to the negotiating table, a second oil supply shock is sure to hit economies around the world, including the United States’. If the Strait of Hormuz is closed for an extended period, or if Persian Gulf oil production infrastructure is severely damaged, the oil supply shock could become a reduction in global oil supply for the foreseeable future. That would be the “oilpocalypse” scenario, where energy prices soar, with all the attendant economic wreckage one expects when a price surges uncontrollably.

The oilpocalypse is not a certainty. Peace would certainly ward it off, and if Persian Gulf oil infrastructures suffer only minimal damage in future attacks, if there is an oil supply shock it may prove less severe than might otherwise be the case.

What is a certainty is that energy prices have already risen for July. Inflation cooled in June, but it is a certainty it will heat up again in July—and quite possibly beyond.

June was a welcome pause in a trend of rising consumer price inflation. Unfortunately, a pause is all we will get. More inflation is headed our way.

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For three hours, Anthony Fauci, former head of the National Institute of Allergy and Infectious Diseases (NIAID) and a chief architect of the COVID Pandemic Panic, sat in front of Rand Paul’s Senate Committee on Homeland Security and Governmental Affairs and refused to say anything other than that he was invoking his Fifth Amendment rights against self-incrimination.

On the advice of counsel, I respectfully decline to answer based upon my rights under the Fifth Amendment of the Constitution.

Quite literally, for three hours, that was his response to every question. This despite having a full pardon from President Joe Biden for anything he might have done as NIAID Director.

With much less fanfare but no less significance, Federal Reserve Chairman Kevin Warsh gave his own presentment of obfuscation, giving a forty-five minute press briefing in the wake of the July meeting of the Federal Open Market Committee and managing to avoid explaining at all why the FOMC chose to stand pat on the federal funds rate for the seventh month in a row.

Anyone hoping for fresh insights into the debacle that was the COVID Pandemic Panic, or how the Federal Reserve intends to force consumer price inflation back to the Holy Grail level of 2 percent year on year came away today disappointed.

Between Fauci’s Senate testimony and Warsh’s press conference, a ginormous amount of words were spoken. Between Fauci’s Senate testimony and Warsh’s press conference, not a damn thing was said.

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Pardon? What Pardon? I Plead The Fifth

I’m rather glad I gave my observations about Anthony Fauci reacting to the release of his diary entries rather than waiting for yesterday’s Senate hearing. At least with the diary entries there was material inviting commentary.

What commentary can one have over someone invoking his Fifth Amendment rights against self-incrimination?

What was notable about Fauci’s testimony is that he invoked right away, at the conclusion of his opening remarks.

Mr. Chairman. Member Peters. Members of the committee, I served at the NIH for over 54 years, 38 of those as director of the National Institute of Allergy and Infectious Diseases. Over that period, I proved that I believe in and respect the value of legitimate congressional oversight. In fact, I testified before and or briefed Senate and House committees Well over 200 times over those 38 years. During and after the COVID pandemic, I have appeared multiple times for hearings in the Senate and the House, usually under oath and sat for several days long transcribed sworn interviews, answering questions about the very issues that are now the subject of this hearing.

However, given Senator Paul’s obvious obsession with calling for my prosecution, his repeated slanderous comments about me, and recently his publicly releasing my unredacted personal diary aimed at embarrassing and intimidating me, the only conclusion I can reach is that the sole reason he is calling me before this committee is to get me to say something, anything that could vindicate his repeated public pledges that I end up in his words, quote, behind bars, unquote.

Any reasonable person who has followed his unhinged obsession with me would readily come to the same conclusion. Therefore, although it pains me to do so because of the respect I have for the legislative branch of government and my decades-long record of cooperating with Congress, under the advice of my attorneys, I will invoke my right under the Fifth Amendment of the Constitution to refrain from answering your questions. Thank you.

The irony, of course, is that it is impossible for Anthony Fauci to incriminate himself with respect to the COVID Pandemic Panic. As one of his last acts before leaving office, President Joe Biden, via the infamous autopen, signed a blanket pardon covering everything Fauci might have done for the decade prior.

The presence of the pardon not only made Fauci’s invocation of the Fifth Amendment bizarre, it arguably made it criminal. For 130 years, the Supreme Court has held that a person who is immune from prosecution1, who cannot therefore incriminate himself, has no Fifth Amendment right against self-incrimination.

Fauci’s persistence in pleading the Fifth was completely boundless, extending even to refusing to answer the most basic questions, such as whether a red folder was in front of him.

Yes, that really happened.

With Fauci refusing to provide any answers at all, the hearing quickly devolved into the typical Washington Clown World theatrics, with Senators in both parties posturing and angling for catchy sound bites. By the end of the hearing some three hours later, absolutely nothing new had been learned. No new information was revealed. Three hours of words, and not a damn thing got said.

Forward Guidance? Try “No Guidance”

Kevin Warsh’s FOMC press briefing was shorter and without the histrionics which are de rigueur for any Congressional action. However, it was as noncommunicative as Fauci’s non-testimony when it came to clarifying Federal Reserve policy on interest rates and consumer price inflation. Not only did Kevin Warsh make good on his commitment to offer no forward guidance at the press briefing, he did his level best to provide no guidance at all.

With the very first question, Warsh chose to bob and weave rather than answer directly even a simple question about what he sensed Wall Street was telling him about where interest rates needed to go next.

Reporter: Thank you for taking our questions, Mr. Chairman. You’ve had a couple months now or nine weeks or whatever number it is to see the markets behave in the absence of forward guidance. I’m wondering if you could tell me what message are you getting from the markets as to where policy ought to be right now?

Kevin Warsh: Yeah, so I think officially it’s eight weeks and four days, but I’m not counting. The message from markets is the message from markets. What I’ve really been trying to do, Steve, as I think you appreciate, your colleagues appreciate, is getting an unfiltered message from markets, getting a direct message, letting buyers and sellers meet at prices for treasuries, for the foreign exchange value of the dollar, and then trying to judge for ourselves, what does that mean about our remit? How are we doing on inflation? How are we doing on employment? We’re trying not to interfere with that market signal. That’s part of the reason why we’ve been somewhat spare in our words when we pulled back from forward guidance. So they’re reacting to events, I would say, much more directly over the 42 days since we last met. This is a good thing.

As I mentioned in the prepared remarks, we’ve seen a material tightening, not just in nominal rates, but in real rates, too. And we’re observing it. We’re trying to stay out of that because, you know, many of you might be interested in our reaction function. We’re interested in the reaction of financial markets.

As for what message Kevin Warsh is hearing from Wall Street? Good luck finding it in that answer, because it isn’t there—a fact the reporter noticed and called Warsh out on that omission.

Reporter: I get that, Mr. Chairman. And I guess the follow-up question is, if the markets are talking to you, what do you hear them saying? And if it’s real rates or higher, it would suggest that that’s where the funds rate ought to go.

Kevin Warsh: I’m sorry, it’s your question. So, interpreting markets is an imperfect business. We central bankers like market pros can think these things are overdetermined, but let me offer some speculation.

First, as we said in the FOMC statement that you got at 2 o’clock, the economy output It’s solid. CapEx and productivity are strong. Labor markets solid, steady. The bond market, the treasury market, it seems to be saying that as well. If I were to try to break down, disaggregate the treasury market signals, I wouldn’t be able to do it perfectly. But the bond market’s saying many of those same things, and that’s why we’re seeing a tightening both in nominals and in reals. Even while at some level we haven’t done much in 42 days, the markets have done quite a bit.

Note that Kevin Warsh said as little in his second answer as in his first.

That was the theme throughout the press briefing. When asked what role July’s cooler than expected CPI print played in yesterday’s FOMC rate decision, Warsh went into an extended ramble about avoiding data dependence and the Fed’s task force on avoiding data dependence.

I’d like to believe that the committee shares my views, which is the historic problem with data dependence is the data and the dependence. We are not relying on any one individual piece of data as cover or as an excuse or as validation.

What I care about and what I think the committee cares about is trends on the data. I’m sure we got some encouraging inflation data. I think at the meeting 42 days ago I said something like 63 months of inflation above target. I didn’t say 64, though the final calculation might be a close one. So we’ll be watching inflation data over the period ahead.

But I also don’t want you to leave the misimpression that we’re sort of breathlessly waiting that.

I’ve called for a task force to revisit both the private and public data we use to make our decision making. That task force is out doing their work. I’ll be checking back in with them the next couple of weeks.

But I wouldn’t say we overly relied on any one piece of data, including that data, which surprised some a couple of weeks ago.

Note what Kevin Warsh did not say: he did not say anything about trends in inflation—the very thing he claims as the center of his focus.

The press conference only went downhill from there.

Unsurprisingly, Wall Street was not pleased. Even though they had projected the FOMC would stand pat on the federal funds rate, after hearing Warsh’s non-answers, stocks dropped precipitously.

Treasuries were similarly nonplussed by Warsh’s non-answers. After holding steady through much of the day, yields began rising as Warsh began speaking.

Only the two-year treasuries responded well to the Warsh press briefing.

A Day Of Non-Communication

On the surface, lumping Fauci’s pleading the Fifth before the Senate with Kevin Warsh announcing the FOMC interest rate decision might seem an odd combination. Certainly we would find little in common between hearings on the COVID Pandemic Panic and a press briefing on interest rates. However, with both happening on the same day, they both stand as ironic bookends of a day of deliberate, willful, non-communications.

Perversely, Kevin Warsh went into his press briefing with the same mindset Anthony Fauci had in his Senate appearance: say as little as possible, and preferably nothing. Both Kevin Warsh and Anthony Fauci clearly succeeded, much to the chagrin of everyone around both men, including the media.

Ironically, the fact that Warsh and Fauci set out to say nothing and succeeded is the most newsworthy aspect of both stories. Kevin Warsh said plainly in his first FOMC presser that he wanted Wall Street to look beyond the Fed for signals about how financial markets should regard interest rates. Anthony Fauci said plainly in his opening statement he would give no further information to Senator Rand Paul and the Committee on Homeland Security and Governmental Affairs.

Wall Street got no further signal from Kevin Warsh. Rand Paul got no further information from Anthony Fauci.

Yet Wall Street was able to process that lack of signal, recognize the uncertainty endemic in Warsh’s approach to the Fed Chairmanship, and repriced both equities and Treasuries accordingly. The lack of signal proved to not be the same as a lack of information.

Rand Paul, through repeated questions, all of which Fauci declined to answer, articulated in full view of the American public all the details already known about Fauci’s misconduct as NIAID Director, including his illicit dealings with EcoHealth and Chinese virology labs in Wuhan. Fauci pleaded the Fifth and so left all statements against him uncontested—an ironic proof of the legal maxim “qui tacet consentire videtur” (“he who is silent is taken to agree”).

Both Wall Street and the Senate Republicans, given the respective silences of Kevin Warsh and Anthony Fauci, were left to ponder a relevant question: “What aren’t they saying?”

What was Kevin Warsh not saying about inflation, or the state of the economy? Will oil supply shocks derail a growing economy? Is inflation about to sink back to the Holy Grail level of 2% without any further Fed intervention?

Why was Fauci not denying the accusations levied against him? He called Rand Paul’s public statements against him “slanderous”, yet when presented with the opportunity to defend himself against those same public statements, Fauci chose silence—and presumably consent. Was Fauci acquiescing to the truth of what Rand Paul has been saying? Was denial no longer a plausible option for Anthony Fauci?

Both Kevin Warsh and Anthony Fauci, in their respective domains, had the perfect platform to broadcast their views across the mediaverse. Both Kevin Warsh and Anthony Fauci had not just a bully pulpit, but a bully megaphone to go with it. Both Kevin Warsh and Anthony Fauci chose to use neither the bully pulpit nor the bully megaphone.

At both the FOMC presser and Anthony Fauci’s Senate hearing, a ginormous number of words were spoken on all sides. Despite all those words, the most significant statement by both Kevin Warsh and Anthony Fauci was not a damn thing.

Irony abounds.

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The new Federal Reserve press policy apparently is not to actually answer any questions at all.

Wall Street was not pleased.

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The Producer Price Index for final demand fell 0.3 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices advanced 0.6 percent in May and 1.1 percent in April. (See table A.) On an unadjusted basis, the index for final demand increased 5.5 percent for the 12 months ended in June.

After the broad price declines from the June CPI report, there is less surprise that the PPI print shows something similar. What is surprising, however, is that, unlike headline consumer price inflation, which had been cooling over the past couple of months after an initial spike in March, headline producer price inflation had not cooled.

In May PPI was running hot. In June PPI was running cold.

What should we make of this very large swing in producer prices?

Is this another signal that the mini-stagflation scenario of the past few months has ended even before it could get seriously underway?

Is this a signal that more deflation has yet to come? Possibly. If that is the case the collapse in price supports across the board could mean that a longer term deflationary trend has taken hold, and the United States is heading into another “lost decade” of minimal or no economic growth.

What is the Producer Price Index trying to tell us? That is an excellent question—lets peel back the layers of data to see if we can construct an excellent answer.

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PPI Is Telling Us Prices Are Still Falling—Sort Of

Recognizing that the Producer Price Index broadly serves as a leading indicator for the Consumer Price Index, the most obvious signal we can see in the PPI data is that prices are still falling—sort of.

As the BLS press release noted, headline producer prices dropped 0.3% month on month in June.

However, core producer price inflation went up month on month, from 0.09% to 0.2%

Pulling back to look at producer price inflation year on year, the headline index eased to 5.5%, but core inflation rose from 4.6% to 4.7%.

Unlike consumer prices, producer prices did not fall across the board in June. Some goods and services are still seeing rising producer prices.

The headline PPI index suggests that we will not see significant inflationary pressure in the headline consumer price inflation data for at least the next month or so. With the core CPI print remaining constant year on year and the core PPI print moving up by 0.1pp, we may see some incremental increases in some core prices, even as prices overall trend down.

Energy Price Inflation Is Correcting Itself

In a repeat of the CPI data, the Producer Price Index for Energy dropped month on month by a fairly substantial 6.4%.

With oil prices having dropped throughout the month of June, this really should be no surprise at all.

Although the ceasefire with Iran is now over, declaring that ceasefire and reopening the Strait of Hormuz has proven hugely beneficial to energy prices in the near term.

If we go by just the data, the Producer Price Index for Energy is telling us that energy prices are still correcting, which would indicate we will see further energy price deflation in July within the CPI. However, we must buffer that thought with the reality that the price of oil is rising again, which will curtail whatever further price deflation the PPI appears to forecast for energy products.

We may see some further energy price deflation in July, but with oil having risen over $12/bbl for West Texas Intermediate, we should expect energy price inflation to return.

Food Prices Should Remain Stable

For food prices, the PPI report is quite at odds with the CPI report.

While the CPI data shows food price inflation heating up somewhat in June, the PPI data shows food prices in outright deflation, month on month.

This may be a stabilizing signal. If food prices are rising now, but are on track to fall again next month, overall food prices are neither trending up nor down.

We could be seeing the same balancing act in other subindices. PPI for Goods, for example, saw producer price inflation heating up in April and May, only to drop significantly in March.

Services, on the other hand, actually rebounded into producer price inflation for June, after printing deflation in May.

Considering that core producer price inflation rose slightly in June, we may very well be seeing indications that core consumer price inflation will be moving up over the summer, even as energy prices continue to fall. What we are not seeing are signs of nascent hyperinflation.

Intermediate Demand Is Cause For Concern

As a general rule, we tend to look at lower prices with a fair bit of enthusiasm. That is natural economic behavior—we always prefer to pay less.

However, there are times when a price drop is a warning sign. The abrupt shift into deflation within the Producer Price Index for Intermediate Demand is one of those times.

Intermediate demand had been heating up since last fall—well before Operation Epic Fury and the war with Iran. Across the entire supply chain, for intermediate demand stages 1 through 4, in June rising prices were abruptly replaced with falling prices.

Is the drop in intermediate demand prices an outlier rather than a trend reversal? We won’t know that until we see next month’s data. As these shifts are month on month, we could easily be looking at a series of one-off price decreases.

We could also be looking at a signal of a slowing economy. If deflation continues within Intermediate Demand prices, we will definitely be looking at a slowing economy. Regardless of what prices do, the outcomes we do not want to see is a slowing economy or a recession.

Intermediate Demand prices suddenly losing altitude may be a recession warning, making the June drop a reason to be concerned.

War With Iran Still The Principal Factor

What seems certain is that the war with Iran, along with its potential for disrupting Persian Gulf oil flows, is going to have an outsized impact on prices for the next few months.

One reason is the uneven and somewhat problematic nature of traffic volumes through the Strait of Hormuz.

While President Trump insists the strategic waterway is open, and without tolls, traffic levels suggest the rest of the world is not entirely assured of the Strait’s safety. As the chairman of the Japan Foreign Trade Council Masahiro Okafuji said bluntly during a press conference, the Strait of Hormuz is “dangerous”.

There is an equally blunt rejoinder, however: the Strait may be dangerous, but avoiding it is costly.

Renewed re-routing of the shipping lanes around the Cape of Good Hope on Africa’s southern tip would hike transportation costs by over 30%, according to Okafuji, who is also chief executive at major Japanese trading house Itochu Corporation.

Following the re-escalation in regional hostilities in recent days, the Joint Maritime Information Center (JMIC) reaffirmed on Tuesday its regional threat level for the Strait of Hormuz at “severe”, which it had raised last week after the first signs emerged of the collapse of the U.S.-Iran ceasefire.

If the world’s freight carriers are doing all they can to avoid sending cargo vessels anywhere near the Persian Gulf, shipping costs are going to be rising for at least the next month or so.

If there should be another ceasefire, so that sailing through the Strait does not seem all that dangerous, we should see traffic levels through the Strait rebound again.

Even with another ceasefire, however, we are not likely to see traffic in the Strait return to the status quo ante right away. After the Memorandum of Understanding was signed, some ships began transiting the Strait once more, but the levels were not at all what they had been before the war with Iran. Signing a new MoU will not make ships any more eager to transit the Strait.

The economic reality is that the uncertainties of the war with Iran are equally uncertainties about prices and the global economy. As we cannot say with certainty how much longer the war with Iran will continue, we cannot say with certainty what is to become of traffic through the Strait of Hormuz. We cannot say with certainty if oil prices will trend back towards $100/bbl. We cannot say if Persian Gulf states will be able to reopen their oil fields or if production will have to be shut in.

If we cannot say with certainty what is likely to happen to fully one-fifth of the world’s oil supply, we cannot say with certainty what needs to happen with oil prices, as well as fuel prices and the prices of other refined petroleum products.

Last month’s ceasefire brought oil prices down by a very wide margin very abruptly. That lack of inflationary pressure has produced at least one month where prices drop because the anticipated supports for any given price or price level have moved lower.

However, the ceasefire is over. Iran is attacking other Persian Gulf states and the US is attacking Iran. The forces which brought oil prices down are already pushing them back up again.

What are we to make of the June Producer Price Index Summary? As with the Consumer Price Index Summary, the report is a one-off report of lower prices. Barring an outbreak of peace in the Middle East, we will not see a second drop in producer prices any time soon.

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Most prices fell last month. Those sectors not in outright deflation month on month showed significant disinflation.

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.4 percent on a seasonally adjusted basis in June after rising 0.5 percent in May, the U.S. Bureau of Labor Statistics reported today. This decline in the all items index was the largest 1-month decrease since April 2020 when it fell 0.8 percent. Over the last 12 months, the all items index increased 3.5 percent before seasonal adjustment.

Headline inflation, core inflation, energy, and both durable and non-durable goods all printed deflation month on month in June. Last month was the month when literally all the prices fell.

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Wall Street Was Expecting Good News, But Not This Good

The drop in prices across the board was unexpected. Wall Street had projected 3.8% year on year headline inflation, and the Trading Economics Forecast had been 3.9%.

The CPI Summary printed headline inflation at 3.5% year on year.

Core inflation was anticipated to be 2.9% year on year, the same yearly inflation rate as in May.

The CPI Summary printed core inflation at 2.6% year on year.

Even the Cleveland Fed’s inflation nowcast had projected higher numbers than what was reported yesterday by the BLS.

Wall Street and corporate media “experts” were anticipating good news in the June inflation report, but they were not expecting the news to be this good.

Economists forecast that falling gas prices will turn the June Consumer Price Index negative, but that doesn’t mean the coast is clear for inflation just yet. Stripping out volatile food and energy prices should show inflation remains well above the Federal Reserve’s target on an annual basis, according to economists.

Still, economists say the good news is that inflation pressures have at least stabilized, and the surge of oil prices earlier in 2026 does not appear to have spread beyond the most energy-sensitive portions of the economy. The question is how other variables in the inflation picture may improve.

Naturally, the enthusiasm over unequivocal economic good news produced a bit of gaslighting as well—why confine oneself to facts when there is the opportunity for propaganda? The prospect of outright deflation in the CPI report led to a few exaggerated headlines:

In reality, the last time the CPI report printed outright deflation was in June of 2024.

Not even Common Core Math can squeeze six years in between then and now.

Wall Street expected good news, and Wall Street got even better news. That does not happen very often.

Deflation Month On Month, Disinflation Year On Year

Month on month, the headline price drop was a fairly substantial 0.4%—the largest decline in headline prices since the COVID Pandemic Panic in 2020, when prices fell 0.8% month on month

Core inflation mostly held steady, slipping a miniscule 0.02% month on month.

The month on month price decline also produced major disinflation year on year, with headline inflation printing at 3.5%.