However, both the Federal Reserve and the market are worried that President Trump’s tariffs will lift goods prices quite markedly in the coming months. This will limit the central bank’s ability to support the economy if weak consumer survey evidence translates into much softer “hard” spending data.
We are a little more relaxed about inflation over the medium to longer term. Tariffs are a one-off step change to prices, whose effect will drop out of the annual price comparison in 12 months’ time. Moreover, the US is overwhelmingly a service sector, and the cost of employing workers is the biggest input, and that has slowed rapidly over the past year.
In addition, housing costs dominate and lead indicators for rents (such as the Cleveland Fed’s new tenant series) suggest that more modest price changes here can mitigate the impact of tariffs on the broad inflation print. The Fed has made it clear that it is in no hurry to move policy and wants time to assess the underlying trends in the economy, so nothing should be expected before September, but I don’t disagree with the market that is anticipating 50bp of cuts before year-end.
