Economists Explain Why Trump’s Tariffs Haven’t Sparked Inflation Yet | WSJ News

Summary

Economists and businesses have anticipated that President Trump's tariffs would lead to higher prices, but recent inflation reports for May have shown a surprising lack of impact. Although some tariff-exposed goods saw price increases, others like new cars and apparel experienced declines. Economists speculate that weak demand and businesses' advance inventory orders are delaying price hikes. While most economists still expect higher inflation due to tariffs, the timing remains uncertain. If mild price increases continue through the summer, it could ease concerns about stagflation and allow the Federal Reserve to focus on softer labor market risks.

Takeaways

• 😀 Economists and businesses have warned that President Trump's steep tariffs could lead to higher prices, but the evidence so far suggests otherwise.
• 😀 Inflation remained low in May, with a 2.4% year-over-year increase, despite concerns about tariff impacts on consumer prices.
• 😀 Some theorize that the current lack of price hikes could be due to weaker demand, preventing businesses from passing on tariff costs to consumers.
• 😀 Another theory is that businesses may have ordered extra inventories in anticipation of tariff increases, delaying price hikes.
• 😀 Prices for some tariff-exposed goods, like appliances and car parts, rose in May, but others like new cars and apparel saw price drops.
• 😀 New car prices fell in May, despite automakers like Ford raising prices on new models, with impacts expected to show in the upcoming months.
• 😀 It typically takes about three months for tariffs to start affecting consumer prices significantly, which explains the delay in observing tariff impacts.
• 😀 Trump's proposed tariffs remain uncertain, with some shipments exempted and tariff rates temporarily lowered as the U.S. and China work through a trade deal.
• 😀 There are underlying risks in the economy, such as a weaker labor market and increasing delinquencies in credit cards and loans, which may limit businesses' ability to raise prices.
• 😀 Most economists still expect tariffs to cause price increases eventually, but the timeline of those increases remains uncertain, with core CPI expected to rise to around 3.7% by the end of the year.

Q & A

What have economists and businesses been warning about regarding President Trump's tariffs?

Economists and businesses have been warning that President Trump's steep tariffs would lead to higher prices. However, the evidence so far doesn't suggest that this is happening, as inflation has remained tame.

Why was the inflation report for May considered cooler than expected?

The inflation report for May showed that consumer prices rose by 2.4% year-over-year and only 0.1% month-over-month, which was lower than economists had anticipated, suggesting that inflationary pressures were weaker than expected.

What are some reasons economists believe tariffs haven't had a significant impact on inflation yet?

One reason is that demand in the economy isn't strong enough for businesses to pass on the tariff-related price increases to consumers. Another reason is that businesses might have preemptively ordered inventories to avoid immediate price hikes.

What items saw price increases due to tariffs in May, and which items saw price drops?

Tariff-exposed goods like appliances, car parts, and audio equipment saw price increases in May, while items like new cars and apparel saw price drops.

Why did new car prices fall unexpectedly in May?

New car prices fell because automakers had not yet fully passed on the price increases from tariffs, though Ford had already announced price increases for some models, which would show up in later months like June and July.

How long does it typically take for tariffs to show notable impacts on prices?

It generally takes about three months after the implementation of tariffs for their impacts to show up notably in prices.

What role do Trump's proposed tariff exemptions and reductions play in the economic situation?

Trump's proposed tariff exemptions and reductions, particularly against China, help delay the expected price hikes by lowering tariff rates until August, allowing both countries to work on a trade deal.

What are some underlying risks in the economy despite the absence of significant price hikes?

The economy is facing risks like a stagnant labor market, where businesses aren't hiring or firing much, and weaker consumer strength, as indicated by higher levels of delinquencies on credit cards and consumer loans.

How has excess savings from the pandemic affected consumer spending and inflation?

The excess savings that households accumulated during the pandemic have largely been spent, reducing the ability of consumers to absorb higher prices, which limits firms' ability to pass on price increases.

What price increases are expected in the near future, according to economists?

Economists expect inflation to rise in the coming months, with core CPI moving from 2.8% to around 3.7% by the end of the year. However, if the China 30% tariffs become the baseline, inflation might stay closer to around 3%. The core PCE inflation, which the Fed tracks, is also expected to rise to about 3.5%.