Fed's inflation theory contradicted by booming manufacturing data

In the United States, August's S&P Global Flash PMI report indicated a notable resurgence in manufacturing and services. The manufacturing index rose to 53.3 from 49.8, marking the strongest growth in over a year. Additionally, the broader composite output index reached 55.4, signifying a robust increase in private sector growth. Companies responded to this demand by raising prices at the fastest rate in three years, providing concrete evidence against the Federal Reserve's narrative that inflation is merely a delayed effect of tariff hikes. The manufacturing sector is demonstrating resilience amid the new tariff regime, challenging longstanding assumptions about the Fed's role in economic growth and inflation management. Critics of the Federal Reserve argue that the current economic conditions contradict the central bank’s inventory theory, which suggests that companies would hold off on price increases until existing stock is depleted. As inventories surge along with demand, it appears that manufacturers are not experiencing pressure to lower prices. This situation raises questions about whether tariffs are inherently inflationary or if foreign exporters are absorbing the costs. Many argue that the Fed's adherence to this theory may lead to excessively tight monetary policy that ultimately hinders economic growth rather than fostering it. Furthermore, the administration under former President Donald Trump has repeatedly claimed that the Fed's interest rate policies have stifled potential economic growth. This argument is built on the premise that the Federal Reserve has direct control over economic expansion, yet critics believe this overlooks the complexities of global capital flows and market forces. As major corporations like Nvidia, Apple, and Tesla thrive, the narrative persists that the economy should be booming under Trump's leadership. However, failures to lower rates have been portrayed as the primary obstacle to achieving even greater economic performance. Lastly, this discourse comes against a historical backdrop where figures like Milton Friedman have influenced perceptions regarding the role of the Fed. Friedman raised the notion that the Fed’s actions were to blame for the Great Depression, thus shaping much of the modern skepticism surrounding central banking intervention. The idea that monetary policy can drive economic growth remains contentious, especially as evidence mounts suggesting that distinct market dynamics play a far more critical role. Thus, the evolving PMI report provides a real-time test of the Fed's theories, and continued inflation undershooting could signal that previous assumptions about tariff effects are fundamentally flawed.