Tariffs are everywhere, except in price indices. That's how you could sum up the situation.
Indeed, tariffs have been filling the news since Donald Trump took office. Announcements are made almost daily, and knowing what is in effect, suspended, in the pipeline, or whatever... is a full-time job.
And beyond the announcements, surveys have already been showing a sharp rise in inflation expectations for several months. Last month, they were at their highest level since 1981 (at 6.6%) in the University of Michigan's consumer confidence survey.
But despite all this, US inflation continues to slow. This is again shown by the consumer price index (CPI) published today. It rose by only 0.1% month-on-month, compared with a median forecast of 0.2% by economists, and after 0.2% the previous month.
On an annual basis, inflation stands at 2.4%, slightly below the consensus forecast of 2.5%, after an annual increase of 2.3% in April.
Excluding the most volatile items such as food and energy, core CPI also slowed, rising by only 0.1% over the month, well below expectations (+0.3%) and down from April (+0.2%).
On an annual basis, core CPI remained stable at 2.8%, again below the consensus forecast of 2.9%.
Core CPI. Sources: US Bureau of Labor Statistics, Trading Economics
Amongst factors contributing to this pleasant surprise were energy prices (down 3.5% year-on-year). In non-volatile items, clothing was down 7.3% year-on-year and airfares were down 0.9% year-on-year.
Fed patience, pressure from the White House
While today's statistics are good news for investors and may give some hope for possible Fed rate cuts, it is still too early to claim victory.
Indeed, it should be remembered that most of the tariffs came into force in April, and today we have statistics for May. So even if current events make April seem like a distant memory, it is quite logical that the impact of the tariffs is not yet visible in the "hard" data. The experience of the 2018 tariffs shows that the "lag time" is more like three months.
This is especially true given that companies built up significant inventories throughout the first quarter, which can automatically delay price increases.
The other question facing us is that of margins. How much of the additional cost of tariffs will be passed on to consumers? And how much will be absorbed into margins? This will determine the impact of customs duties on the CPI, on the one hand, and on corporate profits, on the other.
As Jerome Powell has reiterated several times in recent months, we will therefore have to "wait for more clarity."
But patience is not one of President Trump's qualities. In a message posted on Truth Social, he commented on the day's statistics: "Great numbers! The Fed should drop a full point."
