US Strategy Weekly: Import Prices Negative in May and June

To the best of our knowledge, no economist has written about import prices recently, or the fact that they were negative on a year-over-year basis in both May and June. Import prices excluding petroleum products rose 1.3% YOY in June, but this was down from 1.5% in May, and down from the December 2024 level of 2.3% YOY. Also noteworthy is the fact that US export prices rose to 2.8% YOY in June, up from 1.9% YOY in May. In other words, imports to the US have shown no sign of inflation pressure due to President Trump’s tariffs, conversely, US export prices are rising. Keep in mind that the 10% universal tariff, a 25% tariff on foreign-made cars, tariffs as high as 145% on some Chinese goods, and a 25% tariff on steel and aluminum have been in place since April. In other words, if an investor did not read a newspaper since March, they would not know that there was a new tariff policy imposed by this administration.

Nevertheless, economists, though less negative than they were in April, continue to fear that tariffs will trigger both inflation and an economic slump in the US. Trained economists should know that tariffs do not have a direct impact on consumer prices for a variety of reasons such as: foreign suppliers can absorb part, or all of the tariff, transportation costs could be falling due to the decline in energy prices and absorb all or part of the tariff, retailers could absorb part of the tariff expense through lower margins, or tariffs can be offset by a change in the currency.

However, in 2025 the weakness seen in the dollar is not helping consumers; in fact, it makes imports more expensive. On the other hand, it is helping many large multi-national companies. The dollar is down roughly 10% this year, due in large part to media-driven confusion regarding tariffs, worries about growth, and ballooning government debt. And companies indicating there was a positive impact on recent earnings due to a weaker dollar include Levi Strauss & Co. (LEVI – $20.95), Netflix, Inc. (NFLX – $1190.08), PepsiCo Inc. (PEP – $146.04), 3M Company (MMM – $151.20), BlackRock, Inc. (BLK – 1100.39), Bank of NY Mellon (BK – $98.90), and Coca-Cola Company (KO – 69.66). PepsiCo, with about 40% of total net revenue from outside the US, forecasted a smaller annual profit drop, helped by a weaker dollar. Coca-Cola said annual comparable earnings per share are expected to be near the top end of its target of a 2% to 3% rise, helped by a softer greenback.

According to LSEG research, based on two decades of data, approximately 38% of total S&P 500 revenue is derived from international markets and LSEG estimates that every 1% depreciation in the dollar historically improves S&P 500 earnings per share growth by about 0.6 percentage points. In short, the weakness in the dollar could boost earnings 6%. Of the eleven S&P 500 sectors, technology, consumer discretionary, healthcare, and industrial companies have the highest international exposure.

Still, not all multinationals had good news. General Motors (GM – $48.89) indicated that second-quarter core profit slid 32% as tariffs took a $1.1-billion bite from its bottom line. And a number of defense stocks noted that the weak greenback hurt earnings. Nevertheless, the S&P Dow Jones consensus earnings estimate for calendar 2025 was $255.68, up $1.13, this week and the forecast for 2026 was $297.31, up $1.91. We expect earnings will continue to surprise to the upside. See page 9.

Headline CPI showed prices rising 2.7% YOY in June versus 2.4% YOY in May and core CPI rose 2.9% YOY versus 2.8% YOY in May. However, as we pointed out last week, most of the increases in pricing came from services such as household insurance, up 4.9% YOY, motor vehicle insurance, up 6.1% YOY, and household energy services, up 7.6% YOY. Energy commodity and gasoline prices were down in June, but these declines have not filtered down to the energy service sector. See page 3.

The PCE deflator rose 2.3% YOY in May versus 2.2% in April. But note that all of these rates are below the long-term CPI average of 3.5% YOY. PPI indices are interesting because they reflect the underlying cost of goods and services. For example, back in early 2022, final demand PPI peaked at 11.6% YOY and PPI finished goods peaked at 18.3% YOY, in step with the CPI peaking at 9.1% YOY in June. However, in June 2025 final demand PPI fell from 2.8% YOY to 2.4% YOY. PPI for finished goods, which does not include services such as transporting goods to a retail outlet, was 1.9% YOY, up from 1.3% YOY in May. In short, both indices have been trending lower from their January levels, i.e., 3.8% and 3.1%, respectively. Plus, all PPI indices are well below their long-term average of 3% YOY. See page 4.

The price of crude oil is one of the best, if not the best, lead indicator of inflation and it leads both the PPI and CPI indices. It is therefore important to note that crude oil prices have been, and remain, negative on a year-over-year basis. This is the most favorable aspect of the 2025 economic backdrop in our view, and it ranks second only to the decline in import prices. See page 5.

One could theorize that tariffs will not be felt by consumers until August 1st, when the bulk of President Trump’s new tariffs take effect; however, we believe that the impact will be muted at that time and short-lived. Even the University of Florida consumer sentiment indices showed that inflation expectations fell from 5% in June to 4.4% in July (the lowest since February). And we expect this index will fall further. Given this backdrop it is curious that the Fed lowered rates by 50 basis points in September and 25 basis points in both November and December but has been on a long pause ever since. See page 6.

University of Michigan’s consumer sentiment survey was 61.8 in July, up from 60.7. Present conditions rose to 66.8, up from 64.8 and the expectations index was 58.6, up from 58.1. However, we no longer use sentiment indicators in our analysis due to the political bias embedded in the data. For example, the University of Michigan headline index was 61.8 in July, but for Democrats it was 41.9 down from 42.3 in June. The index for independents was 60.5, up from 55.6. For Republicans, the headline index was 98.2, up from 94.4. In short, sentiment data is biased based upon political party; and while trends for both parties had moved in the same direction in the recent past, in 2025 the trends in sentiment have been completely divergent. See page 7. In short, sentiment data can be misleading. Technical indicators improved in recent days. The 25-day up/down volume oscillator is at 2.71, up nicely from a week ago though still shy of an overbought reading. There was a one-day overbought reading of 3.15 on July 3 and the oscillator was overbought for 9 of 11 days in May. This predicted new highs in the indices. At the moment, this indicator has not – yet — confirmed the new highs seen in the S&P 500 and Nasdaq Composite this week. However, the 10-day average of daily new highs is bullish at 281 and new lows are modest at 51. New highs of 100 or more are consistent with new highs in the indices. Last but far from least, the NYSE cumulative advance/decline line made a new high on July 22, 2025 confirming the string of new highs seen in the averages. Overall, the technical scorecard is solidly bullish. The only negative for the equity market is that it is currently trading at a PE of 23.4 times our estimate of $270 for this year. This is rich and requires additional good earnings results.

Gail Dudack

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