Inflation’s Chill Out and the Economy’s Steady Groove
Daniel Lacalle tells us that the price‑level rise is no longer a wild roller coaster, and the economy is moving like a well‑balanced dance.
What’s the real story behind the numbers?
- Inflation’s pace has settled into a comfy jogging speed. It’s no longer the sprint that previously made folks worry about buying power.
- GDP growth is still keeping a solid beat, meaning more jobs, more wages and that satisfying “we’re getting there” vibe.
- Central bankers have tightened the screws a bit, but the dread of runaway prices is fading.
Why this matters for you
Imagine your paycheck playing a catchy song—your wallet stays on beat. Thanks to this cooling-inflation trend, your purchasing power takes a breath and everyday essentials—groceries, gas, and that pizza you can afford—won’t bite too hard.
Key takeaways in a nutshell
- Inflation is not a runaway—it’s more like a friendly squirrel on a slow walk.
- Economy’s growth remains solid, so hope’s not just a distant echo.
- Stability gives consumers a breather: less fear, more spending.
Bottom line: the market’s got a calm rhythm.
We’re in a patch where the price tags are easing, and the economy is still marching forward. So, grab your favorite coffee, and enjoy the simple, steady buzz of life.
The Tariff Tantrum: Why the World Got the Inflation Story Wrong
1. The Big Mix‑Up
Everyone thought tariffs would blow up prices. The intuition was simple: hit a country with a tariff, and American shoppers would feel the pinch. Wrong move. Tariffs is more of a bargaining chip than a price spike trigger.
2. Supply Chains Are a Maze, Not a Straight Line
Most analysts did a you‑box‑no‑box calculation, treating imports like a single buyer‑seller transaction. Real life? A labyrinth:
- Transporters and storage facilities
- Manufacturing plants juggling over‑capacity
- Retailers scrambling to keep shelves stocked
- Financiers worrying about rolling over working capital
When a tariff hits, the shock gets absorbed and spread across these layers instead of hitting the consumer directly. Think of it as squeezing a soda bottle: the fizz spreads out instead of exploding in one spot.
3. The Over‑Capacity Jitters of Exporters
Export firms—especially in China—’re wrestling with excess inventory and cash crunches. If they can’t move goods fast enough, debts mount and warehouses shut down. This bottleneck dampens the tariff’s price lift, letting markets stay calm.
4. The Price Numbers That Keep the Calm
- Export Price Index (EPI) rose 0.1% in April and 2.0% YoY.
- Import Price Index (IPI) only nudged 0.1% in April and 0.1% YoY.
- Producer Price Index (PPI) dropped 0.5% in final demand for April.
- Headline & core April PPI fell YoY.
Retail sales gained 0.1% in April (up 5.2% vs. April 2024) after a 1.7% jump in March. Meanwhile, consumer inflation slumped to only 2.3% annualised in April—four years low. Core CPI climbed just 2.8%, showing little hint of runaway inflation.
5. GDP: A Tiny Dip, a Big Upswing
First‑quarter GDP data recorded a 0.3% decline overall, yet the private sector posted a 1.6% annual uptick. Government spend fell 5.1%. Financial institutions are already singing “No‑recession” tunes: J P Morgan has quit the recession call, and the Atlanta Fed Nowcast predicts a 2.4% GDP growth in Q2, matching Goldman Sachs and Capital Economics.
6. Monetary Math: Why Tariffs Aren’t the Culprit
Inflation’s real flame is uncontrolled fiscal fire—ramping up government spending inflates money supply and velocity. With deficit spend down 35% from February to April 2025 (vs. last year), money supply is only creeping up, and velocity is cooling. The private sector is tightening, the public sector is narrowing—so nothing to trigger a scary surge in prices.
7. The Takeaway
Tariffs aren’t inflation’s flame; they’re a negotiation tool that opens markets and levels the playing field. The U.S. eat‑market power is bigger than most think—exporters can’t simply shift their U.S. sales elsewhere, and even the EU market is comparatively thin.
Looking ahead, we expect more trade agreements, and the market nervousness will likely fade. The “Tariff Tantrum” proves Keynesian inflation theories are off the mark—and that the best outcomes come from smart trade deals, not protectionist panic.