Where is the Inflation Triggered by Trump's Trade War?

While Trump's trade war has raised concerns about inflation, evidence of its arrival remains limited. However, many economists predict that inflation may appear soon, perhaps as early as this week.

The Consumer Price Index (CPI), one of the US's key inflation gauges, is expected to post its biggest gain in June since Trump raised tariffs to decades-high levels.

Markets predict that the overall CPI will rise by 0.3% month-over-month in June, and the core inflation rate, which excludes food and energy prices, will also rise by 0.3%. The Federal Reserve pays closer attention to core inflation as it provides a better view of future inflation trends. If these forecasts are accurate, US CPI growth on a year-over-year basis will further diverge from the Federal Reserve's 2% target, approaching 3%.

More importantly, such a significant increase in prices in June would be the first real sign that US tariffs are pushing inflation higher – which would make the possibility of the Federal Reserve unexpectedly cutting interest rates in July highly unlikely.

Federal Reserve Chairman Jerome Powell told Congress last month that "we should see this effect (i.e., inflation) in the summer, in the June and July data."

Why Has Tariff-Related Inflation Been Delayed?

Economists offer several explanations:

1. Tariff Adjustments: The White House canceled or reduced numerous tariffs, alleviating some potential price pressures.
2. Early Stockpiling by Companies: Companies stockpiled large quantities of key imported goods before tariffs took effect, allowing them to maintain price stability until inventories are depleted.
3. Offsetting Deflation in Some Areas: Deflationary trends have emerged in other areas of the economy. For example, crude oil prices have fallen by 14% since January, curbing overall US inflation; rent and housing price growth has also fallen to pre-pandemic lows - and since housing costs are the largest spending item for most Americans, its slowdown has made inflation appear moderate.

This doesn't mean there are no signs of tariff-related inflation, such as the prices of goods like tools, furniture, and new cars. Goods prices have risen by 0.3% over the past 12 months. This may not seem like much, but before Trump ordered new tariffs in February, goods prices had been falling for more than a year.

According to economists' forecasts, as tariffs are in place for some time, goods prices will continue to rise, putting upward pressure on inflation. There is considerable debate about the size and duration of the increase, but there is a growing body of opinion that price increases will not be too large and will not last too long.

Some companies choose to raise prices to offset tariff costs, but others choose to maintain low prices to avoid losing customers or market share.

Consumers are showing strong resistance to price increases after suffering from the worst inflation in 40 years.

The result is: inflation has barely risen.

The moderate impact of tariffs on prices has already been noted. Wall Street economists have lowered inflation forecasts and no longer believe they will have a long-term impact.

For example, Wells Fargo expects the core CPI annual rate to rise from the current 2.8% to 3.3% by the end of the year, but it will return to its pre-tax-increase lows by 2026.

"The impact of tariffs on prices is a temporary adjustment," said Sam Bullard, senior economist at Wells Fargo.

Other economists agree with this view. "Any inflationary pressure should be concentrated in the goods sector and be short-lived," Citi analysts wrote in a note to clients.

The challenge facing the Federal Reserve is determining how long the inflation fluctuations or spikes caused by tariffs will last. Most Fed officials believe these increases will not last long. And if they believe the economy needs stimulus, they may ignore short-term increases in inflation.

Economic Risks Calling for Stimulus

It is worth noting that the economy may indeed need stimulus.

The clearest warning sign comes from the labor market: net job gains in the private sector in June were the lowest since last fall, and almost all new jobs were concentrated in the healthcare sector. The number of people receiving weekly unemployment benefits has also risen to a four-year high, indicating that unemployed people are taking longer to find jobs.

Bullard of Wells Fargo said that as long as inflation does not rise significantly, weakness in the labor market may prompt the Federal Reserve to cut interest rates in September. Wall Street investors appear to agree with this view.

"It's all about the labor market," he said.

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Disclaimer: This analysis is for informational purposes only and should not be considered investment advice. Investors should consult a qualified financial advisor before making any investment decisions.