Increase in consumer prices within the U.S. remains constant, while potential consequences of import taxes remain a concern
The ongoing tariffs imposed by President Trump have contributed to a stubbornly high inflation rate in the United States, making it challenging for the Federal Reserve to lower interest rates. In July, underlying inflation rose to 3.1%, up from 2.9% in June.
According to CME's FedWatch tool, there is a 92.2-percent chance of a quarter-point cut at the Fed's next policy meeting in September. However, Diane Swonk, KPMG's chief economist, predicts more price hikes in late summer and early fall, suggesting that a rate cut might not be imminent.
The pass-through of recent tariff increases is expected to be faster due to less time for stockpiling. However, analysts warn that the pass-through from Trump's duties is not yet complete. Consumers have absorbed a growing share of tariff-related costs, predicted to rise from 22% to around 67%, while businesses are passing on less of these costs.
This higher consumer burden means inflation remains elevated, undermining the Fed’s inflation target and limiting their ability to ease monetary policy through rate cuts. Citi analysts argue that the limited pass-through of tariffs to consumer prices could reduce lingering inflation concerns and potentially allow for rate cuts starting in September. However, this view contrasts with evidence that inflation is still sticky due to tariffs.
The ongoing trade tensions, particularly between the U.S. and China, also contribute to economic volatility and the risk of recession. Without clearer de-escalation in tariffs and trade conflicts, the Fed faces a balancing act between controlling inflation and supporting employment.
The potential impact on the U.S. economy includes sustained inflation above target due to tariffs directly raising consumer prices, pressure on household purchasing power as consumers pay higher prices, a slower growth outlook given persistent inflation and trade uncertainty, and a cautious Fed stance on interest rate cuts, maintaining tighter monetary policy longer to anchor inflation expectations.
In July, the consumer price index (CPI) figure held steady compared to June, with the U.S. consumer inflation rate at 2.7%. Prices have risen the most since January for goods that are primarily imported. Many companies have announced plans to pass along higher costs to their customers due to inflation. While indexes for energy and gasoline dropped in July, shelter costs rose.
President Donald Trump has responded to the July CPI figure by attacking Federal Reserve chair Jerome Powell for not lowering interest rates fast enough. In a separate Truth Social post, Trump claimed that tariffs have not caused inflation. However, experts caution that a cooler CPI figure could point to a slowing economy.
References: 1. CNBC 2. Bloomberg
- The tariffs imposed by President Trump are contributing to a persistently high inflation rate in the United States, making it difficult for the Federal Reserve to lower interest rates.
- Analysts predict that the share of tariff-related costs borne by consumers will rise significantly, potentially reaching around 67%, contributing to the elevation of inflation.
- The ongoing trade tensions, particularly between the U.S. and China, are adding to economic volatility and the risk of recession, creating a challenging situation for the Federal Reserve in terms of balancing inflation control and employment support.
- The potential economic impact of tariffs, including their direct impact on raising consumer prices, pressure on household purchasing power, a slower growth outlook, and a cautious Fed stance on interest rate cuts, is a subject of concern in the general-news, finance, business, and politics industries.
- The ongoing tariff dispute between the U.S. and China, as reported in sources such as CNBC and Bloomberg, is a key factor affecting the pass-through of tariff increases to consumer prices and the overall inflation rate.
- Artificial Intelligence (AI) and automation are expected to play a significant role in various industries in the future, potentially influencing the way companies manage costs and pass-through related to tariffs and inflation.
