June 10th, 2025 - Volume 11 (2025) Missive 90 (Tuesday)

• China PPI falls further into deflation

• U.S. durable goods inventories high across all areas of the economy

• The Fed’s strategy to blame inflation for their dalliance is doomed from the start

Yesterday morning, local time, the National Bureau of Statistics of China published its monthly Producer Price Index reading and the results were worse than feared. Coming off a month of April that saw factory gate prices drop 2.7 percent, economists expected a bit of reprieve for the month of May, especially given all the confusion surrounding tariff policy. In fact, the forecast estimate for May’s PPI reading was a marginally better reading of - 2.6 percent, a deflating rate that was just 0.1 percent slower than the April reading. What economists got, however, was a faster pace of PPI deflation in China last month with the official reading coming in at -3.3 percent; the fastest pace of PPI deterioration since April of 2023. And that’s saying something as it was China PPI deflation at that pace back then that arrested the Fed’s tightening stance towards monetary policy and ultimately forced a larger correction in Fed funds over the subsequent year. Looks like we’re headed down that all too familar road here again especially as durable good inventories pile up on factory floors and warehouse shelves at an alarming pace.

U.S. durable goods prices don’t stand a chance with input deflation like this.

With input and final prices falling drastically in China, it is only a very small amount of time until U.S. consumer durable goods prices fall in tandem. The powder keg that is U.S. consumer durable goods is especially good tinder right now given the fact that