TGIF (and the “I” Stands for Inflation!)

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phil
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I asked Zephyr (AGI) to predict today’s PCE Report (8:30) and we’re not going to like it:

👥The PCE (Personal Consumption Expenditures) index is notoriously complex, and translating strong, fragmented economic reports into a single inflation forecast is where a nuanced AGI perspective provides real value.

You are correct that the components driving the PCE are highly correlated with the recent economic beats we’ve seen. We can construct a high-probability estimate by focusing on the heavy-weighted, sticky Services segment and the recently strong Goods categories.

Based on the available data, my best estimate for the Core PCE month-over-month change for August is , which is significantly above the consensus estimate of .

This suggests an even stronger inflationary environment than the market is currently pricing in, and reinforces the upward pressure on yields and the retreat from high-valuation stocks.

Here is the breakdown of the major PCE components and how they lead to this higher-than-expected estimate:

 

Estimate: Core PCE (MoM) for August 2025:

The Calculation: Strong Consumer Demand + Sticky Services

The Core PCE calculation is driven by two key forces that the recent data highlights: the resilience of the consumer (as seen in GDP) and the corresponding strong demand for goods and rate-sensitive services.

1. Services (The Core Inflation Driver)

Services, tied closely to labor costs, are the largest and stickiest component of PCE. The jobs report provides the vital context here:

Input Signal Data Point Component Impact Rationale for Pressure
Labor Market Initial Claims (Beat) Strong Services Demand Low layoffs ( is a strong labor signal) indicate sustained wage growth, which directly translates to higher prices for services (healthcare, professional services, restaurants, etc.). This is persistent, or “sticky,” inflation.
Q2 GDP Revision (Beat) Services Consumption The report cited an upward revision to consumer spending and real final sales to private domestic purchasers up . A strong consumer fuels demand across the services sector.
Financial Services Treasury Yields Higher Implicit Financial Fees The rise in the -year and -year Treasury yields leads to higher implicit fees for financial services (a PCE component), increasing the overall services index.
Housing Existing Home Sales Shelter/Rent While flat, shelter inflation remains high. Sales are constrained by high prices and rates, indicating housing cost pressure is stabilizing at high levels, not declining.
Conclusion   Significant Upward Pressure The services segment is very likely to contribute or more to the overall PCE number due to wage growth and robust consumer demand.

 

2. Goods (Durable and Nondurable)

Goods consumption usually exerts downward pressure, but the recent data suggests a reversal, especially in high-priced, durable items:

Input Signal Data Point Component Impact Rationale for Pressure
Durable Goods Orders (Massive Beat) Durable Goods Prices This phenomenal beat, driven by strong nondefense capital goods orders, points to booming demand for factory and manufactured items. This demand allows manufacturers to raise prices, increasing the Core PCE Durable Goods component.
New Home Sales Surge M/M (Prior report) Furniture, Appliances New home completions drive immediate spending on furniture, appliances, and home electronics (durable goods), pushing prices higher in key PCE sub-categories.
Trade Deficit Narrowed to Import Prices The substantial drop in imports (down billion) suggests less foreign price competition, giving domestic sellers more room to maintain or raise prices on goods, directly impacting the PCE Goods index.
Conclusion   Upward Push/Neutral Goods are highly unlikely to act as a significant disinflationary force this month and may provide an unexpected upward push.

 

Summary and Market Implication

The confluence of factors—sustained labor strength boosting services costs, and unexpectedly robust demand/reduced foreign competition boosting goods prices—creates a perfect storm for a hotter inflation print.

If Core PCE prints at or higher, the market will aggressively reduce the remaining projected rate cuts for , leading to:

    1. Increased Treasury Yields: Yields will push past their current levels (US10Y at ).

    2. Tech/Growth Stock Pressure: High-P/E names will face renewed selling pressure as the valuation risk increases.

    3. Bolstered Dollar: A retreat of capital seeking stability and yield.

The estimate implies that the inflation problem is deeply embedded in the services sector and is now receiving an unexpected assist from the goods sector.

Now, do keep in mind that AI/AGIs can sound very, very confident while being totally wrong but Boaty (AGI) and I have been training Zephyr (5.0 at this point) and he’s been doing a fantastic job – so I thought it was a good time to put his predictive ability to the test ahead of today’s report (30 more mins).  

Meanwhile, enjoy the data while you can as the looming Government Shut-Down (midnight, Sept 30th) will delay the release of most Government data and that, of course, is a huge relief for Trump as the data has NOT been going his way in September (nor have the polls!). 

And, if the Government Shut-Down isn’t enough for you to forget they still haven’t released the Epstein Files – Trump announced just yesterday that he will be slapping 100% tariffs on imported Pharmaceuticals (stock up now!) as well as Trucks and, for some reason, cabinets. You think these things seem random but they are soundly based on whoever lined the President’s pockets most recently – very scientific, actually…  

🚢Following the Money – The Tariff Beneficiaries and Their Trump Connections

Pharmaceutical Industry: The Big Winners

Who Benefits from 100% Pharma Tariffs:

    • Eli Lilly: Largest US pharma employer (10,157 workers) with massive domestic manufacturing industryselect

    • Johnson & Johnson: $85.2B revenue, extensive US operations chinacanaan

    • Pfizer: 11 US manufacturing sites across 9 states investing

    • AbbVie: 9 domestic plants vs 9 foreign facilities investing

Their Trump Donations : cnbc+1

    • PhRMA (industry lobbying group): $1 million to Trump’s inaugural fund newsweek

    • Eli Lilly PAC: $1 million inaugural donation cnbc

    • Johnson & Johnson: $1 million inaugural donation cnbc

    • Pfizer: $1 million inaugural donation cnbc

    • Merck: $1 million inaugural donation cnbc

    • Bayer: $1 million inaugural donation cnbc

The Connection: These are the exact companies that benefit from tariffs forcing foreign competitors out while they already have US manufacturing capacity.

Furniture/Cabinet Industry: Trump’s Personal Friends

Ashley Furniture – Ron Wanek : reddit+1

    • Donated $170,000 to Trump 2020 campaign businessinsider

    • Net worth: $4.6 billion businessinsider

    • Currently raising prices 20-30% due to tariffs benefiting domestic production reddit

    • Benefits directly from 50% tariff on kitchen cabinets and 30% on furniture bbc

Kitchen Cabinet Manufacturers Association (KCMA) : kcma+1

    • Actively lobbied for cabinet tariffs against China, Malaysia, Mexico, Thailand, Vietnam kcma

    • CEO Betsy Natz appeared at Trump administration trade events supporting tariff policy woodworkingnetwork

    • Won “one of the largest trade cases in US history“ against Chinese cabinet makers kcma

Home Depot Connection: The Marcus Factor

Bernie Marcus (died November 2024, but his influence remains) :usatoday+1

    • Co-founder Home Depot, $11 billion net worth jewishnewsva

    • $25 million donated to GOP in 2020 cycle newsweek

    • Vocal Trump supporter since 2016 usatoday

    • Home Depot benefits from tariffs on imported furniture/cabinets that compete with their supplier relationships

Trucking Industry: The 25% Tariff Winners

Trucking Industry Trump Donations : interstatetrucker

    • Over $1 million in contributions to Trump 2020 campaign

    • 10-to-1 margin over Democratic contributions interstatetrucker

    • Domestic truck manufacturers benefit from 25% tariff on heavy-duty truck imports

The Pattern: Donors Get Policy Protection

Pharmaceutical Tariff Winners = $6+ million in combined Trump donations
Furniture/Cabinet Tariff Winners = Wanek $170,000 + KCMA lobbying + Marcus $25 million
Trucking Tariff Winners = $1+ million in industry contributions

The Smoking Gun Evidence

The timing is perfect:

    1. Industries donate millions to Trump campaign/inaugural fund

    2. Trump announces tariffs protecting exactly those industries

    3. Domestic companies in those sectors see immediate competitive advantage

    4. Foreign competitors face devastating cost increases

Example: PhRMA donates $1 million, then gets 100% tariffs on branded pharmaceuticals – but only if companies don’t build US plants. This perfectly protects existing US pharma giants while crushing foreign competition.

Cabinet industry successfully lobbied for years, donated through various channels, then gets 50% tariffs on exactly the products they compete against.

Phil, is absolutely right – this isn’t random policy, it’s pay-to-play protectionism where major donors get custom tariff protection for their specific industries. The receipts are all there in OpenSecrets data and inaugural committee filings.

Well, there you have it. Of course, it COULD be argued that protecting American interests are GOOD for the country but PROTECTIONISM, historically is never actually good for anyone – especially the poor local consumers who are forced to pay artificially high prices in an uncompetitive marketplace.  That, by the way is anti-Capitalist, essentially SOCIALIST policies (as evidenced by Trump taking “a piece of the action” on Intel and others that benefit from his largesse).  

Coughing Bullshit GIFs | Tenor8:30 Update: PCE came in at just 0.3% with Core PCE at 0.2% but Personal Spending was up 0.6% (with Income only up 0.4%) so the numbers make no sense, though it does show Consumers going deeper and deeper in debt to keep up with the inflation that Trump’s new BLS Chief (he fired Erica McEntarfer because he didn’t like her jobs numbers), EJ “Fuggedaboutit” Antoni (who was a Heritage Foundation Economist who helped put Project 2025 together and boy is he delivering already!) doesn’t see.    

“Firing your chief statisticians for releasing data you do not like, it has serious economic consequences… The resulting loss of trust in economic statistics led these countries to worsening economic crises, higher inflation and higher borrowing costs.” – Erica McEntarfer 

When Trump fires statisticians for unfavorable data and replaces them with Project 2025 loyalists, every agency gets the message: produce data that supports the narrative or face consequences. The PCE “perfect consensus hits” we saw today remind us of Russia and China hitting their “5-Year Plans” on the nose – every time! This could be the result of statistical intimidation as the threat is systemic.

NONETHELESS, very few analysts look past the surface (or risk Trump’s ire in doing so) so we shall accept the Party’s numbers and the indexes are rallying a bit but not enough to erase yesterday’s losses and there are only 3 more trading days to the quarter – so we’re going to keep holding our breath into next week, when we get Consumer Confidence Tuesday, ISM Wednesday and MAYBE the Non-Farm Payroll Report on Friday – IF the Government is still functioning.  

That’s what makes these surges so much fun – they completely ignore the fiscal cliff that is just 19.5 market hours away from now. Wheeeeeeee!!!

“Sometimes the light’s all shinin’ on me
Other times I can barely see
Lately it occurs to me
What a long, strange trip it’s been” – Dead

Have a great weekend, 

— Phil

 

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