While there were no major developments on trade policy last week, inflation reports for both consumer and producer prices revealed the negative impact of both tariffs and the Iran conflict on prices and marked a significant increase in September for consumers soon heading to the polls. The consumer price index (CPI) rose 0.6 percent in September, up 3.7 percent compared to September 2025, increasing from August when annual inflation measured 3.4 percent. According to the Federal Reserve Bank of Cleveland’s “Nowcast” last Tuesday, this popular inflation metric was expected to increase by 0.5 percent in September and rise minimally to 3.6 percent year over year. As reported by the Bureau of Labor Statistics (BLS), accounting for more than half of the monthly inflation increase were gas prices, which climbed 9.1 percent in September.
Similarly, the Department of Labor announced the producer price index (PPI) for final demand rose 1.3 percent in September. The index has increased 6.3 percent from a year ago, marking the largest 12-month increase since climbing 6.4 percent in December 2022.
Wholesale inflation ran much hotter than forecast in September. Economists had predicted a 0.5 percent increase for the month and 5.3 percent from a year ago, according to FactSet. August’s increase was adjusted up from 0.4 percent to 0.5 percent for the month and from 5.4 percent to 5.6 percent for the year.
Final demand goods prices jumped 2.6 percent, the largest monthly increase since the index began in 2009, and up 9.8 percent from a year ago. Over 80 percent of September’s increase in goods prices resulted from energy costs, which jumped 10.8 percent and half of the rise can be linked to gasoline prices alone, up 20.3 percent.
Undermining the effectiveness of tariffs aimed at containing China, last Wednesday’s official data indicates that China’s exports soared in September, positioning it for a record annual trade surplus and perhaps highlighting the significance of the pending excess capacity investigation. The United States is not alone in concerns over this disparity; the European Union was reported last week to be cooperating with the United States on excess capacity issues. How all of this impacts the U.S.-China relationship remains to be seen and will likely come into greater focus after the mid-term elections.
How the next Congress handles tariffs should be interesting. As has been noted, legislative actions unlikely to be enacted or signed into law by the President are expected, but concrete legislation restoring Congressional authority over tariffs or rolling tariffs back are less certain. One article published last week examined the wave of bills introduced in Congress that would provide tariff-revenue refunds to consumers hurt by higher prices. According to the author, not only would such proposals be funded by the very duties causing the economic harm, they also overlook the reality that the IEEPA tariff revenue is already committed towards tariff refunds for importers issued by Customs and Border Protection. Time will tell which proposals are merely performative and which could lead to viable legislation, but the possibility of using a small portion of tariff revenue for politically popular rebates while maintaining the larger revenue stream appeals to both sides of the aisle.
In the background, progress on trade deals with a variety of partners appears to continue. Unlike Canada, Mexico has taken a more conciliatory approach in seeking a deal to reduce the tariffs imposed on steel and aluminum and derivative products. Although Commerce Secretary Howard Lutnick reportedly is resistant to making such concessions, there seems to be some progress towards a deal.
It also appears that a deal with Vietnam is coming close to completion.
Finally, in fiscal year 2026, the federal budget deficit rose to $1.99 trillion, its highest level in five years, with both interest on the debt and tariff refunds helping to drive this shortfall. Still undecided is whether to abandon tariffs completely or maintain the newer, perhaps legally stronger ones; ultimately the tariff revenue stream might prove irresistible.
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