Tariffs and Inflation: Economists Reassess

Strategic Insights -

Economists have long predicted a significant jump in consumer prices due to President Trump's tariffs, but data released this week suggests that inflationary pressures remain muted, at least for now. Despite the uncertainty surrounding the trade policy, a growing number of economists believe that tariffs will eventually lead to higher prices, citing the impact of previous trade wars and the current buildup in inventories. However, the timing of this increase is uncertain, and some experts warn that consumers may resist higher prices.

Key Takeaways:

  • Economists predict a significant jump in consumer prices due to tariffs, but data suggests that inflationary pressures remain muted.
  • The impact of tariffs has already rippled through the economy, with businesses stockpiling products before levies were imposed and imports of foreign goods down sharply.
  • The latest survey conducted by the University of Michigan showed consumers slightly less downbeat and expecting less inflation than earlier in the year.
  • The Consumer Price Index rose 0.1 percent in May, a release on Wednesday showed, while U.S. wholesale prices had risen the same 0.1 percent last month, registering a 2.6 percent annual pace.
  • Research conducted by staff at the Federal Reserve Bank of Kansas City suggested it takes 12 to 18 months for higher costs to fully pass through to consumer prices.
  • Economists expect consumer prices to accelerate to a 3 percent annual pace by the end of the year, as measured by the Consumer Price Index.
  • Consumers may resist higher prices, with wages not growing as fast as they did when inflation was soaring after the pandemic.
  • Businesses may find it harder to pass along price increases, risking driving down demand if products become too expensive.
  • The Federal Reserve's wait-and-see approach stays on track, with policymakers holding off on big policy decisions until they have more clarity on Mr. Trump's policies and the economic impact.

Statistics:

  • The Consumer Price Index rose 0.1 percent in May, a release on Wednesday showed.
  • U.S. wholesale prices had risen the same 0.1 percent last month, registering a 2.6 percent annual pace.
  • It takes 12 to 18 months for higher costs to fully pass through to consumer prices, according to research conducted by staff at the Federal Reserve Bank of Kansas City.
  • Economists expect consumer prices to accelerate to a 3 percent annual pace by the end of the year, as measured by the Consumer Price Index.
  • Consumers have become choosier about how they spend their money, with airline fares dropping again in May.

Sources:

  • Byline: Colby Smith
  • The New York Times (June [no date mentioned])