Why Is Inflation Rising and NOT Rising at the Same Time?

The theme of the Personal Consumption Expenditures price index (PCE), which measures inflation and which came out on Friday, was that the smallest part of the economy that is directly impacted by tariffs held relatively close to flat while the biggest part of the economy that would seem to be least tariff-sensitive is rising in price. Many market commentators focused on the smaller part of the economy (goods/manufacturing) as being a good sign for inflation (because they wanted it to be) on the basis that the part of the economy that is impacted directly by tariffs saw almost no change. That is, as I’ll lay out in the article that follows, exactly backward in thinking.

Services make up about 80% of the economy, and inflation is now rising at a high clip in the services sector compared to earlier in the year, but services are not tariffed. So, one would think they’d be less affected. Goods, which are directly tariffed, did not move the PCE needle much at all. What gives? I’ll lay it out, and the picture isn’t as pretty as the stock market and Zero Hedge and those who have been saying tariffs don’t and won’t cause inflation tried to paint it.

In fact, the opposite is true because, if the part that is least prone to rising because it is not even directly tariffed, rises quickly, you’re going to be in bigger trouble still with the part of the economy that is directly tariffed. Furthermore, if the part that is rising quickest at the moment is also the biggest part of the economy, you’re in for even more trouble sooner due to the scale of the part that is rising more quickly.

If inflation didn’t hit goods in PCE, why does it matter?…

The first thing to realize in the present situation is that inflation is just as hard on all of us, whether it is happening in the costs of goods going up or the cost of services rising. The second thing is to realize how tariffs impact services when tariffs are not charged on services … so far.

The short of that is that service companies have to buy all kinds of resources and goods that are provided as part of the service (such as plumbing parts) and supplies needed to do their work (soap, solvents, paper, etc.) in order to provide their services, and they often buy wholesale, so they are not waiting until price changes hit the shelves of retail outlets before they see their costs rise. Their wholesale prices rise due to tariffs more quickly than retail prices, and they don’t typically have large inventory buffers to work through either. All of that’s a big factor. Their cost increases will price through faster than increases do with consumer goods.

The worst part for you is that services are a bigger part of most people’s budgets than purchases of goods. Even housing is treated as a service in inflation metrics. Things like natural gas may be a good, but those things are treated like services, too, because the gas company delivers the gas to you by pipe or truck. So, it’s a gas service or electrical service or your water service. That means a rapid rise in services actually hits you much harder than a rise in goods. It’s actually the worst kind of inflation so the latest PCE inflation report should not have made anyone happy.

All of this fits perfectly into the summer/fall timeline I laid out months ago for the speed at which tariffs will start to work their way into significant rising inflation.

I’ll lay out in this Deeper Dive below for paying subscribers the reasons why the least-affected sector of the economy is rising most quickly and what that means overall. You’ll see how much easier it is to quickly raise service prices than the prices of goods: You probably haven’t read the explanations that follow or the logic behind them anywhere else, as this is not the analysis that most were focusing on because you have to really think it through (but I do all the hard thinking for you, knowing your facile mind will readily appreciate the clear sense of it. After all, why should you have to labor on Labor Day?)

Plus tariffs like this are a new thing for all of us. All of what I’ll present explains why inflation will sneak up and bite most people from behind, but not anyone reading what follows. That’s why I write this stuff … to help find the truth in the nearly opaque media darkness, even as some publications like ZH are strutting right now about how right they are, making them the ones that are about to get bit the hardest. I think most who read on will realize quite clearly what is actually coming. If I prove wrong on something this big, I may even stop writing this stuff … which is to say I believe I intend to hang around awhile ; )

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