The Truth About Tariffs: One-Time Price Shock or Inflation Risk?
Understanding temporary vs. persistent inflation and how to position in a deceleration phase.
Hello Pulsers,
This week’s edition is a bit different.
Rather than focusing on trade ideas or market-moving headlines, I’m zooming out — tackling one major theme and walking through a top-down view of how it could impact markets. Think of it as a framework for making sense of macro news.
Today’s topic: Tariffs — a major headline over the past six months and their impact on inflation.
(Your regular newsletter with trade ideas and commentary will be in your inbox tomorrow.)
📈 Market Recap: Rally Continues
Equities had a strong week — both $SPY and $QQQ hit all-time highs.
That’s a big shift from just 40 days ago, when markets were down nearly 20% amid fears over tariffs and Middle East tensions. Now, we’ve got signs of a ceasefire in the region and cooling inflation data — despite ongoing tariffs.
So… what gives? How are tariffs not stoking inflation?
📦 Tariffs: A Price Shock, Not Persistent Inflation
Tariffs are essentially a tax on imports — paid by the importer. That added cost often gets passed on to consumers. For example, a 10% tariff on electronics might lead Apple to raise iPhone prices by 10% to preserve its margins.
Yes, this raises prices — but it’s not necessarily inflationary.
That’s because inflation measures ongoing price increases. A one-time jump in price levels due to tariffs is a price shock, not a continuous upward trend. Once that shock is absorbed, inflation tends to revert to trend.
Visual Reference:
🔁 What Drives Persistent Inflation?
Inflation becomes a long-term concern when cost pressures are recurring — not one-off events.
Two key drivers:
Input costs: Rising materials or transportation costs.
Wages: A tight labor market can trigger wage spirals, where pay keeps increasing and businesses pass that on in prices.
Unlike tariffs, which are absorbed over time, these pressures compound and keep inflation elevated month after month.
🧭 Why Markets Aren’t Worried
If tariffs raise prices, why aren’t investors panicking?
Because markets are forward-looking — and they see tariffs as temporary. With U.S. midterm elections just 18 months away and polls suggesting Democrats might regain the House, there’s a belief that tariff-heavy executive orders could be reversed or softened.
At the same time, global supply chains are adjusting — with new alliances forming (e.g., EU-Canada, EU-China). That flexibility reassures investors.
📉 Caution: Signs of a Cooling Economy
Despite the market highs, I believe we’re in a deceleration phase — where growth slows but doesn’t necessarily contract.
In this environment, I recommend staying cautious. Maintain equity exposure, but be selective.
Here’s why I believe the economy is cooling:
🧑💼 Job Market Signals:
Continued Claims (4-week trend):
This measures how hard it is for people who’ve lost jobs to find new ones. The trend has been creeping higher — a sign that hiring is slowing.
JOLTS (Job Openings):
While the absolute numbers can be noisy, the rate of change matters. Fewer openings = a softening labor market.
📉 What This Means for Bonds:
In a slowing economy, I prefer some exposure to long-dated bonds like $TLT. Why?
Slower growth → Lower short-term rates
Yield curve steepens (i.e., bull steepener)
Long-term bonds benefit from convexity and duration
Even though bonds have lagged equities lately, I believe the setup still favors owning long bonds as insurance against a slowdown.
Last Words
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Disclaimer
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