Digital disinflation throws cold water on tariff shock theories

Just ahead of Tuesday’s CPI print—a potential pivot point for Fed rate path expectations—one of the most comprehensive real-time inflation indicators has thrown a wrench in the narrative of imminent tariff-driven price spikes. Adobe’s Digital Price Index, a barometer for online commerce covering over 100 million product SKUs, posted a -2.09% YoY decline for June, reinforcing the idea that inflation pressures—at least in digital retail—remain well-contained, if not outright disinflationary.

That’s not what you’d expect if tariffs were already ripping through consumer prices like a freight train. Instead, it’s more like a ripple across calm water. Key categories like apparel (-7.68% YoY), electronics (-2.66%), and even online groceries (-2.04%) are moving in the opposite direction of the tariff fear trade. The standout? Computers—down a staggering 10.73% YoY—despite their deep integration in China’s supply chain.

Either demand has quietly rolled over or, more likely, vendors are eating the cost, slicing margins rather than passing on higher input prices. That tracks with what we’ve seen anecdotally in retail earnings and freight data: front-loaded inventory builds, strategic markdowns, and competitive price compression that mutes the inflationary transmission mechanism.

Meanwhile, consumer sentiment—measured by the University of Michigan survey—remains oddly buoyant given all the geopolitical noise. Whether that’s misplaced optimism or simply the lagging nature of perception versus price reality remains to be seen.

Goldman’s desk still expects core CPI to clock in at 0.23% MoM (vs 0.3% consensus), translating to a YoY print just shy of 3%. But they also warn the tariff effect is a slow fuse, likely to push monthly inflation closer to 0.4% over the next few prints—especially as port-cleared goods begin to reflect April’s tariff schedules.

For now, the market is caught in the gap between what’s priced and what’s arriving. If Tuesday’s CPI undershoots, expect the September rate cut probability to spike and front-end yields to retrace. But if core inflation shows early signs of tariff pass-through, even in select categories, the Fed's glidepath becomes a bit more turbulent.

Either way, Adobe’s data reminds us that tariffs are less like a hurricane and more like high tide—slow, creeping, and only obvious when the water starts lapping over the deck.

Japan's carmakers blink first, confirming who’s really eating Trump's tariffs

For months, the market debate over who bears the brunt of Trump’s tariffs has been muddied by ideology, noise, and flawed economic models. But with hard data now in hand, the verdict is in—and it's not U.S. consumers or corporates footing the bill. It’s the exporters. Specifically, Japan’s automakers.

According to Japan’s Ministry of Finance, passenger vehicle exports to North America plunged 24.7% in value in May, yet fell just 3.9% in volume. That’s not demand destruction—it’s profit compression. Tokyo’s carmakers slashed prices to keep metal moving and market share intact. What began as strategic discounting has now morphed into a full-blown earnings bleed.

The Adobe Digital Price Index showed deflation across online categories in June—including electronics and groceries—indicating that tariff pass-through remains muted on the U.S. consumer side. The deflationary trend in digital goods, coupled with Japan’s export pricing data, exposes the growing disconnect between trade war theory and trade war reality. Consumers aren’t paying more. Exporters are earning less.

The Nikkei’s own reporting now concedes that Japanese automakers have been absorbing the cost of U.S. auto tariffs since what markets now call Liberation Day—Trump’s March announcement ending the 90-day tariff pause. Unit export prices to the U.S. have fallen roughly 20% YoY. The idea that Toyota, Nissan, and Honda could simply pass on the cost was always a mirage. They’ve been quietly taking it on the chin.

And the clock is ticking.

Trump has made it clear: without a deal by July 9, Japan will be slapped with across-the-board tariffs as high as 35%. Washington's negotiating posture has hardened, and Japan’s strategy—refusing to budge without a sectoral carve-out for autos—is running out of road. The U.S. has little incentive to offer concessions when other trade partners have already inked less favorable terms.

Prime Minister Ishiba’s comments this week offered little optimism. He admitted that U.S. cars are a “tough sell” in Japan, citing left-hand drive designs and fuel inefficiency. The implication? A genuine opening of Japan’s auto market is politically radioactive at home. And the U.S. knows it.

In response to the tariff escalation, Japan's automakers are finally cracking. Subaru and Mitsubishi have begun raising prices, while Mazda is exploring the same. This is the moment of capitulation—after months of absorbing costs, they’re passing them on. That will eventually show up in U.S. CPI prints, but not before balance sheets in Tokyo are set ablaze.

What’s next? Likely a recession in Japan’s auto-heavy economy, one that could force the Bank of Japan to pull out every stimulus lever available, including a return to negative rates and fresh asset purchases. That policy trajectory will hit the yen hard—particularly if Japanese capital begins fleeing low domestic yields. A return to USD/JPY at 155-160 is no longer hyperbole. It’s a trade model.

And therein lies the broader risk. This isn’t just a trade war anymore. The next chapter is a currency war—Tokyo’s silent weapon of choice when export margins collapse. A weakened yen might restore competitiveness temporarily, but it risks triggering retaliation, capital controls, and even more aggressive trade posturing from the U.S.

Trump’s message to Japan last week—couched in his trademark brashness—was crystal clear: the free ride is over. The U.S. market is open only to those who reciprocate. Japan’s decision to dig in rather than deal may soon have seismic consequences—for its economy, its currency, and the global financial system.

Traders take note: we’re moving from trade brinkmanship to monetary brinkmanship. The yen is no longer a haven—it’s a pressure valve. And the next big macro rotation may not be into duration or gold, but out of Japanese assets entirely.