This week’s economic news was dominated by trade-related concerns. US manufacturers reported a big jump in producer prices in July, as businesses passed on higher costs to one another. As a result, the US Consumer Price Index is expected to accelerate in the months ahead. In fact, a study by the Yale Budget Lab suggests that tariffs are likely to add 2 percentage points to existing inflation over the course of this year.
This new development is a significant blow to many companies, especially those that import raw materials into the United States. Some of the damage can be mitigated if the United States and other countries are able to reach new trade deals. But for now, uncertainty remains about the future of trade relations with most of the world.
Economic news often affects asset prices such as bond yields and stock prices. However, the significance and sign of these changes aren’t always clear. This is partly due to measurement error associated with survey-based market expectations. Surveys are usually conducted with a lead of a few days or even a week, which means that by the time the data is released, much of what was expected to happen may already be known. To address this problem, the Rigobon–Sack methodology uses a “true” news announcement (the actual indicator release minus the expected value at the time of the survey) to estimate the asset price response. The results suggest that using this approach yields estimates of asset price responses that are more consistent in their sign and magnitude than the standard OLS estimation.