JPM's Gabriela Santos: Inflation report shows very gradual passthrough of higher tariffs
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CNBC
9 minutes ago
- CNBC
As Trump berates Goldman, other economists agree that higher tariff inflation is coming
Goldman Sachs is taking the heat for its call that heavier tariff-induced consumer inflation is ahead, but it's far from alone in that view among its Wall Street brethren. Despite investors' embrace of Tuesday's fairly benign consumer price index report, economists expect that the biggest impact to inflation is yet to come. With pre-tariff inventories rolling off, effective tariff rates climbing higher and companies less willing to absorb higher costs from the duties, the general feeling is that consumers are increasingly going to feel the bite through the rest of the year. "Tariffs could subtract 1% from GDP and add 1-1.5% to inflation, some of which has already occurred," Michael Feroli, chief U.S. economist at JPMorgan Chase, said in a note. "There is considerable uncertainty around the degree of pass-through to consumer prices, given that this year's tariff increases are well larger than anything in the post-war US experience." President Donald Trump lambasted Goldman Sachs on Tuesday for research the firm's economists released over the weekend asserting that consumers will take on a significantly stronger hit from tariffs through the end of the year. Goldman Sachs economist David Mericle, appearing Wednesday on CNBC, defended the call and said the firm was undeterred by Trump's criticism. In a Truth Social post, the president suggested CEO David Solomon fire the economist who wrote the piece or consider resigning himself. However, if every market economist who is in the same camp on tariff impacts were to be dismissed, there would be a lot of empty desks on Wall Street. Most see at least a steady grind higher in prices as tariff clarity emerges and what looks to be effective rates around 18% — compared with around 3% at the start of the year — take root, with some caveats. "It appears that the downward trend in core inflation has been broken as tariffs start to feed through into retail prices," UBS senior economist Brian Rose wrote. "We expect inflation to continue on a gradual upward trend as businesses pass along their higher costs, but slowing shelter inflation and push-back from increasingly stretched consumers should help offset some of the tariff impact." To be sure, no one is calling for runaway inflation — more like monthly gains of 0.3%-0.5%. That's enough to push the Federal Reserve's preferred core measure to somewhere in the low- to mid-3% range. Moreover, whatever the acceleration ends up being, it's not expected to dissuade the Fed from starting to lower interest rates after staying on the sidelines through all of 2025 so far. Economists figure a deteriorating labor market along with a belief that the inflation move will be temporary to allow for easier monetary policy. However, in the near term rising inflation could hold back consumer spending and dent growth through the rest of the year. JPMorgan sees the hit to gross domestic product, two-thirds of which comes from consumption, at "a bit under 1%." The Blue Chip Economic Indicators report for August, which surveys the leading economic names on Wall Street, sees GDP growth averaging just 0.85% in the second half of this year. But that's actually better than the 0.75% forecast from July as some of the most pessimistic forecasters changed their outlooks on the view "that the constraining effect of tariffs is expected to be temporary, as projected growth improves considerably next year," the August report said. Causes for concern in the near term include the Aug. 29 expiration of de minimis tariff exceptions, which had allowed goods valued at under $800 to enter the U.S. duty-free. That could hit retail goods in particular. Pantheon Macroeconomics forecasts a 1 percentage point gain to core inflation, which it sees ultimately hitting 3.5% by the end of the year. "Only about a quarter of that uplift has filtered through to consumers so far, so we see a strong chance core goods prices will rise at a faster pace over coming months," the firm said. BNP Paribas noted that it expects the price increases to go beyond goods as recent surveys are "suggesting upward pressure in services input prices." "The Fed's main worry about inflation is less the exact level and more the question of stickiness," the firm added in a note. "The July [CPI] print, with surprising strength in core services, is therefore not compellingly good news." The issue of inflation "stickiness" is important as well. The Cleveland Fed's measure of sticky price CPI inflation, which includes items such as rent, food away from home, insurance, household furnishings and the like, has shown a steady uptick. It's at 3.8% on a three-month annualized basis, the highest since May 2024. Flexible-price inflation, such as food, energy and motor vehicle parts, is running much lower. "Tariffs will lead to higher inflation in the months ahead," PNC chief economist Gus Faucher wrote. "With the core CPI picking up in July, and higher prices coming as businesses pass along higher tariff costs to their customers, core PCE inflation is set to move even further above the Fed's target in the months ahead." Though most of the Street expects the path to rate cuts opening, higher inflation could give policymakers some hesitation even with a weaker labor market, Faucher said.
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Why Palo Alto Networks (PANW) Stock Is Trading Up Today
What Happened? Shares of cybersecurity provider Palo Alto Networks (NASDAQ:PANW) jumped 3.3% in the pre-market session after it received rating upgrades from two prominent Wall Street analysts, Piper Sandler and Deutsche Bank. Both Piper Sandler and Deutsche Bank upgraded Palo Alto Networks to a "Buy" rating from "Hold." Piper Sandler raised its price target to $225, with the firm expecting the company's push to sell integrated security products to drive a rebound in bookings and accelerate growth into late 2025. Similarly, Deutsche Bank increased its price forecast for the stock to $220. This wave of optimism from Wall Street comes just days before the cybersecurity company is scheduled to report its fourth-quarter earnings on August 18. After the initial pop the shares cooled down to $177.50, up 1.2% from previous close. Is now the time to buy Palo Alto Networks? Access our full analysis report here, it's free. What Is The Market Telling Us Palo Alto Networks's shares are somewhat volatile and have had 12 moves greater than 5% over the last year. In that context, today's move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business. The previous big move we wrote about was about 22 hours ago when the stock gained 4.1% on the news that cooler-than-expected inflation data ignited investor optimism for a potential Federal Reserve interest rate cut. The July Consumer Price Index (CPI) report, an important measure of inflation, came in cooler than expected, showing prices holding steady at an annual rate of 2.7%. This data has led to speculation that the Federal Reserve might lower interest rates. For growth-focused sectors like SaaS, lower interest rates are particularly beneficial as they increase the present value of companies' future earnings, making their stocks more appealing. Palo Alto Networks is down 1.8% since the beginning of the year, and at $177.50 per share, it is trading 14.8% below its 52-week high of $208.28 from February 2025. Investors who bought $1,000 worth of Palo Alto Networks's shares 5 years ago would now be looking at an investment worth $4,072. Today's young investors likely haven't read the timeless lessons in Gorilla Game: Picking Winners In High Technology because it was written more than 20 years ago when Microsoft and Apple were first establishing their supremacy. But if we apply the same principles, then enterprise software stocks leveraging their own generative AI capabilities may well be the Gorillas of the future. So, in that spirit, we are excited to present our Special Free Report on a profitable, fast-growing enterprise software stock that is already riding the automation wave and looking to catch the generative AI next.
