Inflation Still Trending Higher

PCE came in at expectations this past week as it was once again higher than the previous month as it continues to trend higher since the announcement of new tariffs…

As was the case with CPI data a few weeks ago.

Inflation continues to run above the Fed’s 2% target, climbing steadily month after month. All three major inflation indexes are now higher than they were when the new tariffs and extreme tariff rates were announced back in April.

PPI (Produce Price Index) is the one “bright spot,” but with an important caveat. It doesn’t measure imports, so it misses tariff-driven cost increases on goods entering the U.S. Even so, PPI spiked last month because of tariff related services producers faced as the majority of tariffs began taking place in July and August.

While that jump in tariff related services may in fact be transitory, the steady upward pressure on goods and services prices is unlikely to end anytime soon.

Surging commodity prices, combined with elevated bond yields, are signaling that prices will likely continue to increase. Unless tariff policies are rolled back, expect higher inflation to persist as it continues to destroy more buying power.

Before 2020, a few percentage points of higher inflation might have been manageable. But today, after a 25% increase in overall prices in just a few short years, the effect is devastating for most households. Even modest additional increases now cut much deeper into everyday budgets.

Possible Government Shutdown

With federal funding set to expire at midnight on September 30, 2025, a shutdown looks increasingly likely. Negotiations in Congress have stalled, and without a last-minute breakthrough, government funding will lapse October 1.

Key Sticking Points

• Republicans: Favor a short-term 7-week extension (continuing resolution) that maintains current spending but adds security funds for government branches and members.

• Democrats: Want to extend ACA subsidies, block healthcare spending cuts, and make enhanced tax credits permanent. Moves that would maintain broader coverage but increase deficits.

• Senate Filibuster: Any bill requires seven Democratic votes to clear the Senate, giving them leverage despite the Republican majority.

• Breakdown in Talks: Last week, President Trump had canceled meetings with Democratic leaders, and House Republicans canceled votes, both signaling little appetite for compromise.

What History Tells Us

• Most shutdowns temporarily reduce GDP by ~0.2% per week, though much of that loss is typically regained in the next quarter.

• The 2018–19 shutdown cost $11 billion, of which $3 billion was never recovered.

• Small businesses dependent on permits, loans, or federal contracts and regional economies near government centers tend to suffer the most.

• Markets usually shrug it off. The S&P 500 even gained 9.3% during the 5-week 2018–19 shutdown.

While shutdowns create real pain for some workers and businesses, the broader economy and markets typically move past them quickly. Unless the impasse drags on or coincides with other major economic stresses.

Unless lawmakers reach yet another last-minute deal bridging these differences, a shutdown beginning October 1 appears to be in the cards. Although news came out Sunday of a possible meeting between leaders of both parties on Monday to try and avert a shutdown.

Bloomberg did a great write up on what happens when the US government shuts down. You can read it here.

2025 Q2 GDP Revised Higher.

This week, Q2 GDP was revised higher from 3.5% to 3.8% in the BLS’ final Q2 2025 revision for the year.

Some people may gripe about revisions, but the reality is that the current system of speed over perfection gives leaders, investors, and businesses quicker insights into the most up to date economic conditions. Revisions are a normal part of the process as the BLS gets initial estimates out within weeks, not months or years, and then revises that information as more complete data comes in.

Does the Stronger GDP Growth Rate Negate the current Economic Slowdown?

No.

A strong GDP print and higher revision does not mean the slowdown is over. It’s actually pretty normal and completely in line with an Economic Slowdown in the latter part of a Secular Bull market.

Keep in mind that the previous quarter had a negative growth rate. More importantly, this type of GDP behavior is also consistent with Economic Slowdowns of the past. For instance:

• Q3 2019 GDP was 4.8%, while the economy was in a clear Economic Slowdown with a Recession that followed two quarters later.

• Q4 2007 GDP was 2.5%, just before the Great Recession.

• Q2 2000 hit 7.5%, and the economy was in recession less than a year later.

The key difference between the higher GDP prints in 2019 and 2000 and the smaller 2.5% in 2007 is 2019 and 2000 were in the middle and latter stages of a Secular Bull market, whereas 2007 was the latter part of a Secular Bear market.

Markets:

Markets began last week strong, pulled back into Thursday, then rallied to finish near where they began on Monday.

Key Observations

• Buyers quickly stepped in during the modest ~2% retracement, showing continued underlying strength.

• This supports the view that markets are in the late “blow-off top” phase as the 13-year secular bull market transitions toward a secular bear.

Overall, markets continue to steam higher, even as they went through what is typically one of their weakest periods of the year.

$SPY ( ▲ 0.57% ) S&P 500:

$DIA ( ▲ 0.62% ) Dow Jones Industrial Average:

$QQQ ( ▲ 0.41% ) Nasdaq:

$IWM ( ▲ 0.86% ) Russell 2000 (Small Caps):

When markets are stronger during typically weaker months which they have been the past few months, then the odds are high that the period of strength will be strong, if not exceptionally impressive. And the period in which markets are typically the strongest begins this week.

Anything can happen, but historically, betting on the continued strength in stocks is a great bet to make. Especially with so many incredible looking set ups turning into break outs while yet even more stocks continue to set up. Especially in the land of small caps which are repeatedly pumping out some massive winners.

Set ups like this one in $BMNR ( ▲ 1.88% ) , which looks great coming into the new week.

Trump also posted a positive video on cannabinoids on Sunday night, so look for a possible solid move in weed stocks as well. And maybe this time, the move will stick for the cannabis sector $MSOS ( ▼ 3.74% ) , which has been the only sector not to put in a great run the past three years while consistently hitting new lows.

Significant Economic Data from the previous week:

Economic Data to watch this week:

Quote of the Week:

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