Tariffs and Inflation: Economists Reassess their Predictions

Economists had long forecast that the latest round of tariffs imposed by President Trump would lead to a significant increase in consumer prices. However, new data suggests that inflationary pressures remain more muted than expected, leaving forecasters to reassess their predictions. While economists acknowledge that tariffs have affected prices, they argue that the impact has not yet shown up in broad measures of inflation like the Consumer Price Index (CPI).

Key Takeaways:

• Economists' predictions for a jump in consumer prices may be too early or wrong, as recent data shows inflationary pressures remaining more muted than expected.
• Tariffs have already rippled through the economy in several ways, including businesses rushing to stock up on products before levies were imposed and uncertainty stoked by the administration's frequent pivots on trade policy.
• April's inflation reports showed the early imprint of tariffs on goods exposed to levies, but prices retreated in May, while goods that had gotten cheaper became more expensive.
• Economists expect the impact of tariffs to become more significant this summer, with some predicting inflation to accelerate to a 3 percent annual pace by the end of the year.
• The milder data could mean that the forthcoming inflation spike may be more contained than once feared, but this view is contingent on Trump's holding off on raising current tariff rates or threatening new levies.
• Consumers are becoming choosier about how they spend their money, with people starting to cut back on spending and airlines fares dropping again in May.
• Businesses may find it harder to pass along price increases to consumers due to higher resistance to accepting higher prices, and could eat into their profits by absorbing some of the costs.
• The Federal Reserve is taking a wait-and-see approach, holding off on big policy decisions until they have more clarity on the economic impact of tariffs.

Statistics:

• The Bureau of Labor Statistics reported a 0.1% increase in the CPI in May, or 2.4% from a year earlier.
• U.S. wholesale prices also rose 0.1% last month, registering a 2.6% annual pace.
• Consumers' expectations about inflation have increased, although they are bracing for higher prices, with the University of Michigan's survey showing consumers expecting less inflation than earlier in the year.
• The share of people who say the economy is getting worse fell 3.6 percentage points to 84.4% in May, the best reading since January.
• The Dallas Fed's labor market conditions index, which provides a comprehensive snapshot of the U.S. labor market, shows increasing labor market conditions but still low layoffs.
• Airline fares dropped again in May, with the latest survey conducted by the Bureau of Transportation Statistics showing a 3.4% decline in fares from the same period last year.

Sources:

• "Economists are undeterred — for now" by The New York Times, May 31, 2023.
• "Consumer Price Index" by the Bureau of Labor Statistics, May 2023.
• "Inflation Insights" by Omair Sharif, May 2023.
• "The Federal Reserve's wait-and-see approach" by The New York Times, June 2023.