Tariff-Induced Inflation May Be Less Harsh Than First Thought, Economists Say

07:24 AM EDT, 07/02/2025 (MT Newswires) -- Inflation related to President Donald Trump's widespread tariff rollout is still likely, but it may be less severe than originally thought.

Following Trump's move to announce import duties on dozens of countries on April 2, a date the president called "liberation day," inflation expectations rose among Federal Reserve policymakers as well as private-sector economists. Fed Chair Jerome Powell said Tuesday the tariff rollout has caused the central bank to hold steady on rates rather than cut.

"Effectively, we went on hold when we saw the size of the tariffs, and essentially, all inflation forecasts went up materially as a consequence of tariffs," Powell said during a panel discussion of central bankers hosted by the European Central Bank.

Tariff-related inflation, however, has yet to surface in a meaningful way.

The core personal consumption expenditures index, which excludes volatile food and energy prices and is the Fed's preferred inflation gauge, rose 2.7% year over year in May, up from 2.6% in April but not significantly above the Fed's long-term 2% target. Including food and energy prices, the overall PCE index rose 2.3%, up from 2.2% in April.

"We haven't seen effects much from tariffs, and we didn't expect to by now," Powell said. "We expect to see over the summer some higher readings, but we're prepared to learn that it can be higher or lower or later or sooner than we expected."

One key factor keeping a lid on inflation is the actions taken by businesses at the start of the year as they looked ahead to Trump's anticipated tariff announcement, Natixis Chief US Economist Christopher Hodge said in an exclusive interview with MT Newswires.

"When you go back to (first-quarter) data, you saw this tremendous build up in inventories as companies tried to restock at fairly low prices, comparatively speaking," he said. "As those inventories get run down, I do think we're going to see more of an impact on consumer prices."

That impact may be less significant than experts originally predicted, he said.

Goldman Sachs analysts on Monday altered their 2025 US monetary policy projection to three quarter-point cuts from one, saying that "early evidence suggests that the tariff effects look a bit smaller than we expected."

"It's going to vary by sector, but the distribution [of costs] between compression in retailer profits, of the lowering of import costs with exporters taking the hit, and the pass-along to consumers, that ratio may change from what we've seen from the tariff shock in the first Trump administration," Hodge said. "We don't have great data on what that is right now, but it looks like exporters, preliminarily, are bearing more of the cost than they had in the 2018 cycle."

That assessment would seem to confirm, at least somewhat, Trump's stance that foreign exporters would "eat" the cost of tariffs in order to maintain their access to US consumers.

"That's a dynamic that can persist for a little while, but at some point they're going to look for other export markets or renegotiate prices higher, so this is all fluid at this point," Hodge said. "But the point about exporters not wanting to miss out on the US market, that's a really valid point. I think the data has shown that in the first Trump administration, exporters did eat a portion of that cost. That proportion of where that tariff levy is impacted, that may be a little different, but it's not to say that we're not going to get pass-through to the consumer, but we might just be more equally distributed."

Powell declined to answer whether a July rate cut is on the table, but he said "a solid majority of (Federal Open Market Committee) participants expect it to become appropriate to begin reducing rates again" in 2025.

The Fed chair was quick to add that any decision on rates will be shaped by forthcoming data -- on inflation and employment.

Natixis' Hodge said he has two rate cuts -- one in October and the other in December -- penciled in this year, albeit with caveats pertaining to the July 9 deadline when the 90-day pause on Trump's tariffs will end.

"But if we do climb down from this really heated trade war rhetoric and don't have a huge increase in tariffs from July 9, I'm probably going to be inclined to add an extra cut in there given the amount of pass-through we've seen so far on tariffs," he said.

MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.