The Tale of the Tariffs: Where’s the Inflation?

Economic literature states that tariffs raise consumer prices in the importing country. At face value, this makes sense: Politicians are applying a tax on foreign goods, making the products more expensive, and forcing businesses to pass the extra costs onto shoppers. Federal Reserve economists have looked at this issue again and reached two conclusions: Yes, tariffs cause higher prices, but they only affect specific goods rather than lead to a broader inflationary cycle. Two other questions have become prominent in today’s economic climate. First, will tariffs lead to one-time price adjustments or persistent cost pressures? Second, where’s the inflation anyway?

Neighborhood Inflation Watch

A flurry of economic data was released this week, resulting in a collective and temporary sigh of relief. The president’s levies have yet to trigger a tidal wave of inflation on the American people.

The April consumer price index (CPI) report set the tone for what would come. The headline annual inflation rate slowed to 2.3%, the lowest reading since February 2021, and came in below economists' expectations of 2.4%. Core inflation, which removes the volatile food and energy categories, was stuck at 2.8% for the second consecutive month. Even measuring on a monthly basis, CPI and core CPI rose at a modest 0.2%.

Wholesale inflation recorded its sharpest drop since the onset of the coronavirus pandemic. Last month, the producer price index (PPI) – a gauge of what businesses pay for goods and services and pass on to consumers – fell 0.5%, down from the previous month's upwardly adjusted 0%. On a 12-month basis, PPI and core PPI slowed sharply to 2.4% and 3.1%, respectively.

While the PPI is typically buried at the bottom of the business section, economists view it as a vital measurement because it can indicate future inflation since it is early in the supply chain.

Despite companies rushing to front-run President Donald Trump's tariffs, the accelerated demand did little to impact prices. Last month, import and export prices each fell 0.1%. Year-over-year, import costs slowed to 0.1%, and export prices eased to 2%.

The Federal Reserve’s preferred inflation measure, the personal consumption expenditure (PCE) price index, will finish the month. According to the Cleveland Fed's Inflation Nowcasting model estimate, the April PCE and core PCE will come in at 2.2% and 2.6%, respectively. Of course, the positive direction of inflation will not force the US central bank to restart the rate-cutting cycle.

Where’s the Inflation?

Truflation, a popular private metric for US inflation since it monitors millions of data points, suggests the situation is stable. The US Inflation Index is 1.85%. But is this the calm before the storm? An examination of its chart suggests that clouds could be forming.

A chorus of economists has suggested that tariff-related price inflation could begin appearing later in the year. This is because tariffs typically operate with a lag effect, meaning that the impact of the administration's higher import duties is not felt immediately.

Considering what companies have done in recent months, it makes sense. Businesses have been rushing to the West and East Coast ports, ramping up their purchases of foreign goods to avert the bulk of President Trump's levies. Vizion, a global shipping tracker platform, showed that all exports bound for the United States rocketed 77% in the week ending Feb. 3 and surged 40% in the week ending May 5. Chinese shipments to the United States exploded 320% at the beginning of February and 71% in the first week of May.

This essentially bought companies and consumers some time before raising prices, mirroring what transpired in 1930 before President Herbert Hoover signed the landmark tariff legislation: the Smoot-Hawley Tariff Act. Put simply, prices might only increase after businesses exhaust their inventories, and the tariffed imports seep into the US marketplace.

Walmart became one of the largest retail behemoths to warn shoppers that it is getting ready to hike prices. Despite two-thirds of the products it sells being sourced in the United States, consumers will see adjusted price tags in the coming months. “We will do our best to keep our prices as low as possible but given the magnitude of the tariffs, even at the reduced levels announced this week, we aren’t able to absorb all the pressure given the reality of narrow retail margins,” said Walmart CEO Doug McMillon in a May 15 earnings call.

It turns out that the US-China trade agreement did little to assuage corporate America’s fears.

The Waiting Game

Ultimately, since the world is in the infancy stage of the president’s trade agenda, economic observers may have to wait until the summer or fall to determine if the doom-and-gloom prognostications are accurate or if Wall Street panicked in April for no reason.