The Consumer Price Index rose just 0.1% for the month after declining 0.4% in June, bringing the annual rate down slightly from 3.5% to 3.4%. Core CPI rose 0.2% and declined on an annual basis from 2.6% to 2.5%. Yet inflation is not one number, and anyone looking only at 3.4% is missing what is taking place underneath the surface.
The first layer is energy, and this is where the headline number becomes extremely misleading. Energy prices declined another 1.5% in July after collapsing 5.7% in June, which restrained the overall CPI considerably. Gasoline fell 2.9% for the month, but gasoline is still 24.6% higher than one year ago. Fuel oil is up an astonishing 39.1% year over year, electricity is up 4.2%, natural gas is up 4.3%, and the entire energy index remains 14.7% above July 2025. So when they tell you inflation is cooling, they are describing the rate of change from June to July while ignoring what people are actually paying compared with last summer.
This is why I have disagreed with New York Fed President John Williams suggesting that inflation has peaked. That assumes the geopolitical situation has peaked, and there is no basis for making that assumption. The United States has been cushioning the energy shock by drawing down petroleum inventories, but those inventories eventually have to be replenished. The war involving Iran has not disappeared, the Middle East remains unstable, and Trump himself said this week that one option is to hit Tehran “really, really hard.”
War is inflationary from almost every direction. It raises oil and transportation costs, increases insurance premiums on shipping, disrupts fertilizer and agricultural markets, diverts industrial production into military production, creates shortages, and forces governments to borrow extraordinary sums to finance weapons and military operations. Europe is simultaneously embarking upon its largest military buildup in generations while already struggling with sovereign debt. Those costs eventually migrate through the world economy.
Food is the second layer, and here again the headline does not tell the story experienced by households. Overall food prices rose 0.1% in July and are 3% higher than one year ago. Grocery prices actually declined 0.1% for the month, helped by a 0.7% decline in meats, poultry, fish, and eggs, a 1.5% drop in pork, and an extraordinary 16.4% decline in lettuce. Fruits and vegetables remain 5.1% more expensive than last year, nonalcoholic beverages are up 4.1%, cereals and bakery products are up 2.7%, and the overall grocery basket remains 2.7% higher.
Restaurant prices increased 0.3% in July and 3.4% over the year. Limited-service restaurants, which include many fast-food establishments that people traditionally used as inexpensive alternatives, raised prices 0.4% in a single month and 3.3% over the year. Full-service restaurants are up 3.4%. This reflects labor, rent, insurance, electricity, transportation, ingredients, and financing costs moving through the entire chain before the customer ever sees the menu.
Housing is the third layer and remains the largest burden for millions of households. Shelter increased only 0.1% in July, but that accounted for roughly two-thirds of the entire monthly increase in CPI because shelter carries such enormous weight in the index. Both actual rent and owners’ equivalent rent increased 0.3% during the month, while shelter remains 3.2% higher than one year ago.
Healthcare provides yet another layer that cannot simply be dismissed as “core inflation.” Medical care increased 0.4% in July. Medical care services rose 0.6%, hospital services increased 0.5%, and physicians’ services advanced another 0.2%. Prescription drugs provided some relief by falling 0.8%, but anyone who actually pays insurance premiums, deductibles, hospital bills, or elder-care expenses knows that healthcare has become one of the largest financial threats facing American families.
Transportation presents an equally distorted picture. Gasoline declined in July, but airline fares jumped 2.2% in a single month and are now 25.5% higher than one year ago. Used cars and trucks increased 0.4% in July, although they remain 1.9% lower annually, while new vehicles edged 0.1% higher. Transportation services rose 0.3% during the month. Motor vehicle insurance finally declined 0.3% after falling 2% in June, but that comes after years in which insurance became one of the fastest-rising expenses in the household budget. A few months of moderation do not return those premiums to where they were before the surge.
Then there is the inflation buried throughout ordinary life that receives almost no attention. Communication costs increased 0.6% in July, education rose 0.5%, recreation increased 0.2%, apparel rose 0.1%, household furnishings increased, and services excluding energy services remain 3% higher than a year ago. Apparel is up 3.9% annually, recreation 2.6%, and household furnishings and operations 2.2%. These increases may appear small individually, but households pay all of them simultaneously.
This is where the entire political discussion about inflation becomes dishonest. Inflation falling from 3.5% to 3.4% does not mean prices fell 0.1%. It means the overall price level is still rising, only at a slightly slower annual rate. Actual deflation would be required to return the price level to where it was before.
There is also a fourth layer that CPI cannot adequately measure, which is asset inflation. A house, farmland, stocks, gold, and other tangible assets can rise because capital is moving away from government debt or because the purchasing power of money itself is declining. Someone who already owns assets can become wealthier during an inflationary period. This is how inflation widens the gap between classes even when the official statistics suggest conditions are improving.
The Federal Reserve will now debate whether 3.4% inflation and 2.5% core inflation justify holding rates steady or eventually easing policy. The Fed’s benchmark rate remains between 3.50% and 3.75%, and before today’s report markets were assigning roughly a 46% probability to a September increase. Yet the Fed is attempting to steer an economy whose largest inflation risks are increasingly geopolitical and fiscal rather than purely monetary. Washington is running massive structural deficits while the world is simultaneously increasing military expenditures and preparing for additional conflict. Interest rates cannot correct fiscal irresponsibility, nor can they negotiate peace in Ukraine or the Middle East.
Taiwan began seriously examining Ukraine’s battlefield experience after Russia invaded in 2022. Taipei has since partnered with Auterion, the American-German drone software company whose systems have been tested under actual combat conditions in Ukraine. Auterion CEO Lorenz Meier stated, “What we offer has been battle-tested in Ukraine to deter aggression and destroy tanks, naval vessels, and other truly expensive equipment.” That is precisely the lesson Taiwan needs. A smaller nation does not defeat an industrial giant buying program. It survives by dispersing thousands of inexpensive weapons that can remain hidden, move quickly, operate after command systems are damaged, and continue killing an invasion force when the conventional military structure begins to break down.
Taiwan is studying Ukraine because Ukraine has become the testing ground for how the next major war will be fought. The battles are no longer determined simply by who owns the most tanks, fighter jets, or aircraft carriers. Cheap drones are destroying equipment worth millions, mobile missiles are forcing fleets away from coastlines, electronic warfare is disabling sophisticated weapons, and factories must replace losses faster than the enemy can destroy them. Taiwan knows it cannot match China ship for ship or missile for missile. It must make the Taiwan Strait so costly, chaotic, and bloody that Beijing hesitates before giving the order to invade.
Taiwan introduced two domestically produced medium-range attack drones during its latest Han Kuang exercises. They were integrated into coastal combat operations alongside fast missile boats, special forces, and Coast Guard vessels. The drones resemble the loitering weapons Ukraine has used to reach behind Russian lines, attack supply routes, destroy equipment, and force Moscow to defend targets hundreds or even thousands of miles from the battlefield. Taiwan wants to apply the same principle to Chinese landing ships, command posts, ammunition vessels, radar systems, fuel depots, and troops attempting to establish a beachhead.
Taipei is considering NT$210 billion, approximately $6.6 billion, for surveillance and attack drones through 2031, while an alternative legislative proposal would authorize NT$240 billion. Broader plans call for purchasing as many as 200,000 aerial drones and 1,000 unmanned surface vessels, with an industrial goal of producing 100,000 drones per month by 2030. Taiwan also intends to expand its anti-ship missile arsenal beyond 1,800 weapons by early 2029. Many will be placed on mobile launchers that can hide in tunnels, under bridges, inside warehouses, and throughout Taiwan’s mountainous terrain before moving immediately after firing.
The timing should not be ignored. The computer’s international War Cycle identified 2026 as a Panic Cycle, with the cycle building into 2027 and a critical Taiwan and China period emerging around 2029. That does not mean China must invade on one predetermined day. Cycles identify the period when pressure, political miscalculation, capital movement, military preparation, and international conflict begin converging. We have already entered the expansion phase. The Ukraine conflict has spread deeper into Russia, the Middle East has erupted, Europe is militarizing, Japan is abandoning its postwar restraints, and Taiwan is transforming itself into a heavily armed island fortress. These are not isolated stories. They are symptoms of the same global turn toward war.
The 2029 target is particularly disturbing because military preparations now being announced are scheduled to mature around that same period. Taiwan wants more than 1,800 anti-ship missiles by early 2029. Drone production is being pushed toward enormous capacity by 2030. China is expanding its navy, missile forces, nuclear arsenal, amphibious capabilities, and converted drone fleet now. Governments do not spend these sums because they expect eternal peace. They see the same horizon even if they refuse to tell the public what they are preparing for.
Taiwan is also attempting to create a “non-red” drone industry that does not depend upon Chinese components. This is essential. A nation cannot claim to possess an independent defense industry when the motors, batteries, circuit boards, magnets, cameras, communications equipment, and navigation systems inside its weapons come from the country it expects to fight. Ukraine discovered that supply chains are weapons. Taiwan understands that Beijing could restrict critical components before firing a single missile, crippling production while Chinese factories continue operating at full capacity.
Taiwanese companies have reportedly sent more than 100,000 drones to Ukraine through intermediaries since 2025. Some Taiwanese systems have been submitted to Ukrainian forces for battlefield testing, where they face electronic jamming, GPS denial, broken communications, extreme weather, and an enemy that adapts within days.
Taiwan has even begun teaching civilians how to fly drones manually without depending on GPS or automated navigation. Civil-defense organizations are training ordinary people in reconnaissance, communications, first aid, emergency response, and drone operation. This is gritty preparation because Taiwan understands that if China attacks, there will be no safe rear area. Ports will be hit, power may disappear, cellular networks could fail, hospitals could be overwhelmed, and civilian infrastructure will become part of the battlefield almost immediately. There will be no time to learn these skills after the bombs begin falling.
The difference between Ukraine and Taiwan remains enormous. NATO can move artillery shells, fuel, vehicles, medical supplies, and replacement weapons into Ukraine across a long land border with Poland and other European states. Taiwan has no Poland. It is an island surrounded by water, sitting barely 100 miles from mainland China. Once Beijing imposes a naval and air blockade, the weapons Taiwan failed to stockpile beforehand may never arrive. Every missile, drone, spare part, generator, medical kit, and barrel of fuel needed to survive must already be on the island, protected and dispersed before the first strike.
This is why all the talk about treating Taiwan like Ukraine is dangerous nonsense. The United States cannot wait until an invasion begins and then debate arms packages for six months. A Chinese blockade could prevent those weapons from ever reaching Taiwanese forces. CSIS concluded that there is no real “Ukraine model” for Taiwan because Taiwan must begin the war with nearly everything it expects to use. If the stockpiles are insufficient on the first day, Congress cannot repair that failure by holding another press conference.
A war with China would be the most dangerous conflict the United States has encountered since World War II, and Washington is not remotely prepared for the scale of destruction. China is not Iraq, Afghanistan, Libya, or Serbia. It is a nuclear power with the world’s largest navy by hull count, a massive missile inventory, extensive cyber and space capabilities, and an industrial base that can manufacture ships, drones, electronics, and munitions on a scale the United States abandoned years ago. America outsourced manufacturing to China, enriched its future adversary, depleted its weapons in peripheral wars, and now talks as though victory in the Pacific would be quick and painless.
CSIS ran 24 simulations of a Chinese invasion. The United States and its allies usually prevented China from occupying Taiwan, but the supposed victory was horrific. The United States lost dozens of ships, hundreds of aircraft, thousands of troops, and normally two aircraft carriers within a few weeks. Taiwan’s navy was destroyed and its economy was devastated. Japan lost ships and aircraft as its bases became targets. China also suffered enormous losses, but that does not make the destruction disappear. A victory that leaves carriers at the bottom of the Pacific, thousands dead, and Taiwan reduced to rubble is not the clean triumph politicians will sell to the public.
Another CSIS assessment found that the United States could exhaust some critical long-range precision-guided munitions within the first week of a Taiwan conflict. One week. Washington has spent years handing weapons to allies while pretending inventories are infinite and production lines can be restarted with the stroke of a pen. Ships take years to build. Missile factories cannot multiply output overnight. Skilled workers, machine tools, microelectronics, propellants, and specialized components cannot be summoned because Congress approves another trillion dollars.
China could also strike American bases in Japan, Guam, and elsewhere across the Pacific. Supply networks, satellites, ports, fuel storage facilities, communications cables, and power systems would all become targets. Americans have not experienced a major-power war in the modern age and have been conditioned to believe conflict is something watched on television from a safe distance. That illusion would disappear the moment ships were sunk, bases destroyed, communications disrupted, and thousands of casualty notifications began reaching American homes.
The War Cycle is not moving toward stability. It is moving toward greater confrontation as we approach 2027 and the critical 2029 period for Taiwan and China. Taiwan is preparing because it sees what happened to Ukraine when diplomacy failed and politicians assumed war could be controlled. Washington continues pretending it can fight Russia indirectly, wage war in the Middle East, defend Europe, confront China, and finance the entire operation with endless debt.
Europe has spent years talking about “de-risking” from China while the physical infrastructure connecting European consumers to Chinese production continues expanding in the opposite direction. The latest development is in Kazakhstan, where construction is underway on the new Beineu-Saksaulsk highway that will dramatically shorten the overland route connecting China with Europe. Kazakhstan’s Ministry of Transport says the project will eliminate almost 1,000 kilometers from existing transit routes, cut delivery times by as much as three days, and could increase cargo volumes along the route by 2.5 times. This is unquestionably good news for China because Beijing does not need Europe to embrace China politically when economics keeps pulling the two together.
The project involves roughly 800 kilometers of new highway running through Kazakhstan’s Mangystau, Aktobe, and Kyzylorda regions toward the Caspian ports of Aktau and Kuryk, with completion scheduled for 2029. From there, cargo can cross the Caspian into Azerbaijan, continue through Georgia and Türkiye, and enter European markets without traveling through Russia. This is part of the Trans-Caspian International Transport Route, better known as the Middle Corridor, which already stretches more than 4,000 kilometers from western China into Europe. What was once discussed as an alternative trade route is steadily becoming a serious piece of Eurasian infrastructure.
China benefits enormously from this development because transportation is one of the hidden costs determining whether manufacturing remains competitive. Saving nearly 1,000 kilometers does not merely shorten a line on a map. It reduces fuel consumption, driver time, equipment utilization, warehousing requirements, and potentially the amount of capital trapped inside goods while they are traveling between manufacturer and customer. If Kazakhstan succeeds in cutting three days from the journey while increasing capacity 2.5-fold, Chinese exporters gain another commercially viable route into one of the world’s wealthiest consumer markets.
This comes at exactly the right moment for Beijing. Western governments have spent the past several years trying to reduce their dependence on Chinese manufacturing, yet China remains extraordinarily difficult to replace because it possesses something politicians cannot recreate by legislation: an industrial ecosystem built over decades. China produces the machinery, batteries, electronics, chemicals, solar equipment, components, consumer goods, and increasingly the automobiles that foreign markets demand. Tariffs can make those products more expensive, but improving transportation networks work in the opposite direction by reducing friction between Chinese factories and foreign consumers.
The Middle Corridor has already undergone a remarkable expansion since the Ukraine conflict disrupted the traditional northern trade route through Russia. Cargo volume across the Caspian portion of the corridor increased more than 63% in 2024 alone to approximately 4.1 million tons, compared with roughly 500,000 tons before Russia’s invasion of Ukraine. Other estimates indicate freight traffic along the broader corridor has increased nearly tenfold since 2022. The countries along the route are now targeting 600 container trains originating in China and traveling through Kazakhstan during 2026. That is no longer some theoretical Belt and Road project sitting on a planning document. Commerce is already moving.
Kazakhstan may emerge as one of the largest beneficiaries because geography has become an economic asset. The country sits between China, Russia, the Caspian Sea, and the European market, giving it the ability to become a logistics bridge between East and West. Kazakhstan has established seven international road corridors and is investing heavily in railways, ports, highways, terminals, and digital infrastructure. President Kassym-Jomart Tokayev’s government clearly understands that controlling the roads through which international commerce moves can be almost as valuable as producing the goods themselves.
Europe is also pouring money into this corridor because Brussels wants transportation routes that bypass Russia. Kazakhstan and European partners announced another $462 million in Middle Corridor agreements in June, while EU investment in Kazakhstan has already exceeded $200 billion and bilateral trade reached $45.1 billion during 2025. Brussels sees this as strategic diversification away from Moscow, but China can use precisely the same infrastructure to deepen commercial access to Europe. The Europeans may believe they are constructing strategic autonomy, while Beijing sees another road leading directly from Chinese manufacturing centers toward European customers.
Beijing’s Belt and Road strategy was never merely about owning ports or financing foreign construction projects. The larger objective has been connectivity. Every additional railway, highway, pipeline, terminal, and logistics hub increases China’s access to markets while reducing dependence on maritime routes vulnerable to geopolitical disruption. China remains heavily dependent upon ocean shipping, and any confrontation involving Taiwan or the South China Sea would expose that vulnerability immediately. A functioning network of Eurasian land corridors therefore has strategic value extending far beyond the price of transporting another container of electronics to Germany.
There is also a lesson here for those who believe tariffs alone can reverse China’s manufacturing advantage. Europe can impose duties on Chinese electric vehicles and politicians can announce another investigation into Chinese subsidies, but European consumers will continue looking at price. If a Chinese manufacturer can produce an electric vehicle, battery, solar panel, or industrial component substantially cheaper than its European competitor and the transportation network becomes faster and more efficient, Brussels will find itself fighting economics with regulations. That becomes increasingly difficult when European industry is already burdened by high energy prices, taxation, environmental mandates, labor costs, and regulation.
China does not need to conquer Europe to increase its influence. Trade has always been far more powerful than political speeches because supply chains create relationships that governments eventually find difficult to unwind. The Middle Corridor is gradually constructing another economic artery across Eurasia, and Kazakhstan’s new highway removes nearly 1,000 kilometers from that system while potentially multiplying its cargo capacity. Europe may celebrate because the route bypasses Russia, Kazakhstan will profit because it becomes the bridge, but China gains something even more valuable: another faster road into the European marketplace.
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