A Perfect Economic Storm

On Wednesday, the Consumer Price Index for September came in hotter than expected. Inflation was up at an annual rate of 3.7 percent. Gasoline prices rose 34 percent over the past year, and home heating oil is up a staggering 74 percent.

Combined with other factors, this news spooked the stock market. The tech-heavy Nasdaq fell by 2.7 percent.

Then on Thursday, the Producer Price Index (PPI) report clocked a wholesale price rise of 1.3 percent just in September, an increase of 6.3 percent over the past year, and the largest 12-month increase since December 2022.

The other factors signaling deep trouble include a bond market that keeps bidding up rates on long-term Treasury securities, now the highest since 2002, reflecting expectations of more inflation, and increasing interest costs throughout the economy. This in turn adds to consumer and small-business pain and increases borrowing costs for the heavily leveraged tech sector. Mortgages are now well above 7 percent.

President Trump’s deal with Vladimir Putin to buy 300,000 tons of Russian diesel infuriated legislators of both parties as foreign policy, but as Paul Krugman pointed out, Trump evidently failed to do the arithmetic. That quantity equals just half a day of U.S. diesel consumption.

As Krugman wrote, “I would strongly guess that they didn’t do the math, that 300,000 tons sounded like a lot to them and that they had no idea that it was trivial for an economy the size of America’s.”

If Trump didn’t check the math, the markets quickly did. The price of diesel dropped a few cents on the announcement of the deal, and then returned to trend.

In addition, the likely slowdown in the AI build-out adds to the risk of a crash. The seemingly strong economy has been heavily reliant on AI borrowing and spending. Likewise high-flying tech stocks, which are heavily invested in each other. Whether from the mass protests against data centers, or a sense in the industry that AI has overinvested in its future market, or from genuine worries about risk, a slowdown is coming.

All of this means that a highly leveraged economy is likely to unwind; and unwinding rarely proceeds in an orderly fashion.

How much of this is Trump’s doing? When Trump took office in January 2025, the COVID-driven inflation had been wrung out of the economy. Nearly all of the resurgent inflation, and in turn the higher interest rates, is the result of direct and indirect effects of the Iran war, plus Trump’s chaotic tariffs.

And for the sixth month in a row, real wage growth has lagged price increases, signaling stagflation. This jams the Fed. Where slow growth might signal the need for lower rates, the high and rising price levels could trigger additional rate hikes, further sandbagging growth.

The Fed has one more rate-setting meeting before the election, on October 27-28. A rate hike could spook financial markets further. Fed Chair Kevin Warsh made upbeat comments at an IMF meeting in Bangkok suggesting that the Fed might hold off on raising rates. That was enough to reassure the stock market—for now. At some point, this confidence game has to end.

Coda: When the Democrats come back into power, there will be a massive need for rebuilding, and extensive investment will also be needed as stimulus.

Earlier this week, I wrote a post asking where the jobs will come from as AI displaces more and more employment. Several readers wrote me to point out that in addition to the human service jobs that I proposed, there will be a need for millions of jobs in such areas as environmental remediation, new green infrastructure, as well as housing construction.

There is never a shortage of useful work to be done, though free-market capitalism fails to provide the payment mechanisms to create the needed jobs. We can resume that project once Trump, his war, and his stagflation are behind us.