Douglas Porter

August 15, 2025

It’s somehow appropriate that the leaders of the U.S. and Russia are meeting on this date, as August 15 is an important day in history

Most obviously, 80 years ago it marked the end of World War II with V-J Day. Just two years later, in 1947, it marked the day of India’s Independence after 200 years of British rule, and South Korea was founded exactly a year after that. And, it’s also the day the Panama Canal opened in 1914, while the Berlin Wall was constructed in 1961 on the Ides of August (okay, technically, that’s August 13). For music buffs, it was the first day of Woodstock in 1969, and also the day the Beatles played Shea Stadium in 1965 (the start of stadium rock). But for market buffs, it also marked the day of the “Nixon Shock” in 1971, when the U.S. officially broke from the gold standard (effectively devaluing the dollar) and then imposed wage & price controls and introduced a 10% tariff on all imports for a six-month period. Not that it says anything about tariffs or Alaska, but Apocalypse Now was released the same day 8 years later in 1979.

There’s a certain symmetry to the fact that we’re talking about the Nixon Shock 54 years later, as each of the three major components of the plan echo today. Gold prices have been rollicking (and up almost 100-fold since 1971, a tidy return indeed) while the U.S. dollar has been on the ropes for most of this year. Of course, inflation remains a central concern—more on that later—albeit few are talking about wage/price controls any longer. And, finally, tariffs have roared back onto the scene, after pretty much being a sleeping giant from 1971 until late last decade.

While most of the attention was on Alaska and the streets of Washington this week, the trade story just won’t let go. The rolling debate on the impact of tariffs figured prominently in both the moderate July CPI—nothing to see here folks—to the meaty PPI just two days later—tariffs are running amok! Our bottom-line takeaway is that there are some signs that tariffs are creeping into prices, especially at the producer level—how could they not?—but consumers have been largely spared so far. Core consumer goods have risen at a mild 1.1% annual rate in the past six months. There is an entire cottage industry trying to figure out why the impact has been so mild to this point, and it likely boils down to these factors (and there are probably more):

1. Stockpiling ahead of the well-telegraphed tariff spree. In many cases, those inventories are now being worked down, and the piper will be paid.
2. Companies are eating some of the tariffs for now to maintain market share and/or in the faint hope that tariffs will go away. This may be especially the case for exporters from nations where the currency has been quite weak, and profit margins were thus fat (e.g., Japan, where the yen is still 20% weaker than its 10-year average, even with a comeback this year). More generally, U.S. corporate profit margins had been very strong historically heading into this year, so there was some room to manoeuvre.
3. Exemptions and finding new suppliers have kept actual tariffs paid well below the headline rate. As an example, the July budget figures from Washington showed a record $28.4 billion in customs receipts. That is a little more than 10.5% of import values from the prior month, compared with 2.7% last year, and versus roughly a 15% headline tariff rate that month.
4. Delays and some confusion over precisely what tariffs should be charged. Goods that were already on a ship headed for the U.S. would only face the tariff in place when the product was loaded on board.

The main point is that none of these constraints are sustainable, and we are bound to see further pressure on consumer prices in the months to come. Households certainly seem to sense that as the preliminary reading on August inflation expectations from the University of Michigan saw a big back-up on both a 1- and 5-year horizon; the latter popped to 3.9%, almost a point above year-ago levels. However, make no mistake, given that the actual tariff rate paid on imports has already climbed above 10%, it is still remarkable how little of that has worked its way into consumer inflation.

Perhaps the bigger debate is when those price increases inevitably land: will it be a one-time affair, or will it launch a mini-replay of 2021/22? We lean mostly to the former, although it will depend critically on how robust underlying demand is in the year ahead. On that front, this week’s signals were mixed, with retail sales holding up well in July, as both headline and control sales rose 0.5% m/m, and the latter up 4.8% y/y. But on the other side, sentiment is soggy and job growth has cooled considerably.

So, what’s the Fed to do? The market initially ran with the CPI and fully priced in a September cut, with visions of even a 50 bp move dancing in their heads… until the sour PPI and a variety of Fed speakers injected some caution. Now, market pricing is more or less back in sync with our view that the Fed will cut 25 bps in September and then proceed cautiously from there with similar moves about once a quarter until late next year. Of course, life and the economic data are rarely that neat and tidy. That reality seemed to play out for stocks this week, as the S&P 500 raced to a record high on prospects for big rate cuts, before showing some late-week caution on the precise path forward.

Chair Powell may provide a trace of guidance on that front at next Friday’s speech at the KC Fed’s annual Jackson Hole confab. This event may be a little bit more closely watched than usual given the intense pressure on the Chair, and the fact that it will be his last such address. The audience is likely to be unusually sympathetic, concerned both about maintaining Fed independence, but now apparently Wall Street independence as well. This year’s theme is: “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy.” Very apropos, given the brouhaha over the latest jobs report, and the changeover at the BLS, and, yes, one could say that the job market is in “transition”.

The strong probability that the Fed will begin cutting rates again next month has revived the possibility of Bank of Canada cuts. This week’s Summary of Deliberations from the latest meeting revealed a clear spilt in the Council on where rates are headed next. While some believe more is needed, most striking was the plain language that others believe that the Bank has already done enough, especially given the lags involved in monetary policy. We would counter that there are also long lags to the historic shift in Canada’s trade relationship with the U.S., and there could be much tougher news to come. Moreover, with China now piling on with aggressive tariffs on canola (essentially a blockade) and lumber being hit with a ratcheting up of U.S. duties, it’s far too early to be counting the final costs of the trade battles.

This space continues to believe that policy will ultimately need to do more to support the economy in the year ahead, although—yes—it may take time for the Bank to grow comfortable on the inflation front. Canada’s headline event next week is the July CPI on Tuesday; lower gasoline prices may trim the headline rate a bit further below 2%, but we suspect that cores will stay sticky around 3%, giving the Bank little breathing room just yet. On a final note, while the Bank sees the trade war as a shock to aggregate supply, which they can’t really fight, we would assert that with retaliation fairly light (and perhaps poised to back off somewhat), the skewering of major export markets is much more of a demand shock, where easier policies—both fiscal and monetary—will indeed need to play a supporting role.

Policy Contributing Writer Douglas Porter is Chief Economist for BMO.