News of the week summary - 17/08/2025

Tariffs complicate US inflation picture 

The latest US inflation data paints a complex picture of how tariffs are reshaping the economy. On the one hand, consumer price inflation (CPI) held steady at 2.7% in July, slightly below expectations of 2.8%. This offered temporary relief to markets, with the S&P 500 hitting a record high and traders boosting bets that the Federal Reserve will cut rates at its September meeting. Core inflation, which excludes volatile food and energy costs, ticked up to 3.1%, suggesting underlying price pressures remain.

Yet deeper in the supply chain, producer prices tell a different story. The Producer Price Index (PPI), which measures wholesale prices charged by US producers, surged 3.3% year-on-year in July, the strongest increase in five months. Analysts attribute this rise to the impact of tariffs, which have raised costs for businesses reliant on imported goods and materials. For now, many firms are absorbing or delaying passing on these costs to consumers, which explains the gap between producer prices and consumer inflation. But economists warn that these pressures could soon filter through to households, especially in import-sensitive sectors like tools, appliances, and furnishings.

Financial markets are caught between these crosscurrents. The modest CPI figures fueled expectations of a quarter-point Fed rate cut next month, with futures markets pricing the odds near certainty. Treasury yields fell on the data, reflecting bets on looser policy. However, the sharp rise in wholesale prices raised questions about how sustainable low consumer inflation can be if producers continue to face higher costs. A shift from “hidden” price pressures at the wholesale level to visible increases at the retail level could complicate the Fed’s decision-making.

President Trump has seized on the stable CPI reading to claim tariffs are not harming the economy, dismissing fears of inflationary fallout. But economists remain divided. Some argue the inflationary impact is only beginning to emerge, while others contend tariffs will have limited long-term effects. The debate is unfolding amid intensifying political pressure on the Fed, with Trump publicly demanding aggressive rate cuts while simultaneously reshaping the leadership of key economic agencies.

China’s growth falters as trade tensions bite

China’s economic expansion showed signs of slowing in July, highlighting mounting pressures from both domestic challenges and international trade tensions. Industrial output, which measures the total production of factories, mines, and utilities, increased by 5.7% compared with the previous year, down from June’s 6.8% growth and marking the slowest pace since last November. Retail sales, a key gauge of consumer spending, rose just 3.7%, weaker than June’s 4.8% increase.

Several factors are contributing to this slowdown. China’s housing market, a major driver of growth, has been stagnating for four years, with new home prices across 70 cities falling 0.3% in July. Housing weakness not only affects construction and real estate activity but also dampens consumer confidence, as households perceive less wealth and reduce spending.

At the same time, the government is grappling with “involution,” a term used to describe excessive production capacity that leads to overproduction and falling prices. This dynamic has contributed to disinflationary pressures: consumer prices were flat year-on-year in July, while producer prices, reflecting what manufacturers receive for goods, fell 3.6%. Deflation (or even very low inflation) can discourage spending and investment, since companies expect lower future prices for their products, further slowing growth.

Policymakers have introduced measures to boost consumption, including subsidies for new parents and appliance trade-in schemes. Yet economists warn that these efforts may be insufficient. The property sector remains the primary source of deflationary pressure, and structural issues such as low demand expectations and limited fiscal space constrain the government’s ability to reignite rapid growth.

Exports have provided some support, growing 7.2% in July, but uncertainty from the ongoing US-China trade conflict continues to cloud the outlook. Even with the recent 90-day pause in the trade war, economists caution that weaker global demand in the second half of the year could further weigh on growth. Overall, the data suggest that China faces a delicate balancing act: stimulating domestic consumption while managing industrial overcapacity and external trade pressures.

Modi pushes for a self-reliant India 

Indian Prime Minister Narendra Modi has reiterated his long-standing goal of creating a “self-reliant India” in response to rising trade tensions with the United States. In a speech marking India’s 78th Independence Day, Modi outlined plans to reduce dependence on imports for key technologies, including semiconductors and military engines, while announcing tax and regulatory reforms aimed at supporting the middle class and domestic businesses.

The speech comes shortly after the US imposed steep tariffs on Indian goods, raising duties to 50% on certain products, including a secondary tariff on India’s purchases of Russian oil. While Modi did not directly mention the US tariffs, his rhetoric emphasized economic nationalism and protection of domestic industries, particularly agriculture, signaling a determination to shield Indian farmers from foreign competition.

Modi pledged that domestically produced semiconductor chips would reach the market by year-end, a move intended to strengthen India’s technology sector and reduce reliance on foreign suppliers. He also promised to reform the goods and services tax by October, easing the burden on middle-class taxpayers.

The trade standoff has strained the historically expanding strategic partnership between India and the US, reigniting skepticism in India toward Western countries and reinforcing ties with Russia. Economists say that Modi faces a delicate balance: signaling strong domestic protection to maintain political support, while keeping channels open for pragmatic negotiations with the US to avoid long-term trade disruption.

US and China extend trade truce

Washington and Beijing agreed to extend their fragile trade war truce by 90 days, averting an escalation in tariffs that could have further rattled global markets. President Trump confirmed the extension just hours before new levies were due to take effect, keeping average US tariffs on Chinese goods at over 50% but delaying a planned increase. In return, China suspended most of its retaliatory duties, offering temporary relief to strained economic relations.

Both governments framed the pause as a chance to deepen negotiations. The Chinese embassy in Washington emphasized the need for “understanding” and “cooperation,” while Trump’s executive order pointed to “significant steps” by Beijing to address US concerns about trade imbalances and national security. Talks in Geneva and Stockholm earlier this year helped pave the way, and further rounds of dialogue are expected before the November deadline.

Despite the truce, underlying tensions remain high. The US has considered loosening export restrictions on semiconductors, including allowing companies like Nvidia and AMD to sell advanced chips to China for a fee. Meanwhile, China continues to impose additional tariffs of 10-15% on certain US goods such as soybeans and energy products, keeping pressure on American exporters.

The temporary pause also comes as Trump recalibrates trade policy elsewhere, lowering tariffs in deals with the EU and Japan but hitting countries like India and Brazil with higher duties. 

For markets, the extension of the truce provides some short-term relief, but the broader trade relationship between the world’s two largest economies remains unsettled. With tariffs already elevated and structural disagreements unresolved (ranging from technology to state subsidies) the current calm looks more like a temporary reprieve than a lasting resolution.