Trump tariffs show muted impact in US inflation so far

Inflation in the United States rose 0.1 per cent month-on-month to reach 2.4 per cent in May, according to data released on Wednesday.

Core inflation, which excludes food and energy prices, was recorded at 2.8 per cent for May. Both inflation and core inflation were below expectations.

This shows that US President Donald Trump’s tariffs have not yet had a substantial effect on prices.

The muted effect would suggest that most of the businesses have not yet passed on increased costs completely to customers, but the Federal Bank of New York found in its May survey that most of the businesses had passed on at least some of the tariffs to their customers, with nearly half of the service-oriented businesses passing on increased costs to customers by raising their prices and a third of manufacturers doing the same.

However, industries that are most affected by tariffs, such as the furniture industry, have experienced drops in prices, according to The New York Times.

In May, furniture prices fell by 0.8 per cent, clothing prices fell by 0.4 per cent, and cars’ prices also fell.

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A more accurate reason for low inflation could be that businesses are still in the process of clearing their pre-tariffs inventory and business as well as customers are showing cautious behaviour regarding pricing and purchases respectively. The Times also noted that fall in airline fares and energy prices also helped to offset any hike in prices due to tariffs to an extent.

Inflation expected to rise in upcoming months

Economists have said that the situation regarding inflation is expected to change in the coming months.

The Federal Reserve in its latest report on the economy noted that there were “widespread reports of contacts expecting costs and prices to rise at a faster rate going forward”. Businesses expected they would pass on the increased costs to customers “within three months”.

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Samuel Tombs, the Chief US Economist at Pantheon Macroeconomics, told The Times that the impact of tariffs on inflation in May was “microscopic” but also said that was “entirely in keeping with past evidence showing that retailers usually take at least three months to pass on cost increases to consumers”.

As noted earlier, it appears that businesses had stockpiled inventories ahead of Trump’s rollout of tariffs that has allowed them to sell at lower prices for an extended duration.

Both businesses and customers are playing cautious where customers are not quite sure what they’re going to buy and businesses just do not have the nerve to increase prices until they have to, David Kelly, the Chief Global Strategist at JPMorgan Asset Management, told The Times.

Kelly further said, “The general sogginess of the economy and the nervousness among retailers is preventing it from coming through very fast.”

Despite such a behaviour, if current tariffs stay in place, price pressures would start to build up late this summer and peak in the fourth quarter of the year, leading up to annual inflation of 4 per cent, according to Kelly.

Amid such an environment, the Federal Reserve is likely to keep interest rates unchanged despite Trump’s calls to cut rates.