The Expected Cooling of Inflation and the Threat of Tariffs
The U.S. economy was bracing for a slight slowdown in price growth in February, as forecasters anticipated a cooling of inflation ahead of the latest Consumer Price Index (CPI) report. However, President Donald Trump’s tariff policies continued to cast a shadow over the economic landscape, threatening to disrupt the fragile balance. The Bureau of Labor Statistics was set to release its monthly inflation report, with expectations that the core CPI, which excludes volatile food and energy prices, would ease from 0.4% to 0.3% on a monthly basis and from 3.3% to 3.2% year-over-year. Meanwhile, the broader CPI measure was projected to slow further due to declining fuel prices. Despite these forecasts, the lingering uncertainty caused by Trump’s trade policies loomed large, raising concerns about the future trajectory of inflation.
The Conflict Between Trump’s Tariff Policies and Price Stability
President Trump entered office with a promise to reduce prices, a goal that most mainstream economists view as challenging, if not impossible, to achieve responsibly while simultaneously imposing tariffs. Trump’s tariff policies have been a cornerstone of his economic agenda, yet they have introduced significant uncertainty into the U.S. economy. On the eve of the CPI report, Trump doubled down on his tariff threats, vowing to increase steel and aluminum duties to as high as 50% in response to Canada’s 25% surcharge on electricity imports to some U.S. states. While Trump has only implemented a limited set of tariffs so far—20% on certain Chinese goods and 25% on items outside the U.S.-Mexico-Canada trade pact—his rhetoric alone has been enough to unsettle markets and disrupt spending plans for both businesses and consumers.
Economic Uncertainty and Its Impact on Inflation
The U.S. economy is caught in a web of conflicting forces, with tariffs contributing to inflationary pressures while a weakening economy works to counteract them. Mark Zandi, chief economist at Moody’s Analytics, described the situation as a battle of “massive cross-currents,” where the inflationary effects of tariffs clash with the deflationary impact of a slowing economy. Zandi expressed skepticism about the Federal Reserve’s ability to meet its 2% inflation target in the near future, predicting that the U.S. would be fortunate to come within half a percentage point of that goal. He warned that the only scenario in which inflation might return to the 2% target is if the economy stalls, a situation that could occur even without a full-blown recession. In such a case, inflation could rise, but for reasons tied to economic weakness rather than growth.
Small Businesses and Consumers Wrestle with Inflation
The National Federation of Independent Businesses (NFIB) reported that inflation remains a major challenge for small businesses. In its latest survey, the NFIB found that the net percentage of small business owners raising prices jumped 10 points from January to a net 32%, marking the largest monthly increase since April 2021 and the third highest in the survey’s history. Additionally, the percentage of owners lowering prices dropped 10 points compared to the previous year. Looking ahead, a net 29% of small business owners planned to raise prices in the next three months, the highest reading in 11 months. NFIB Chief Economist Bill Dunkelberg highlighted that inflation remains the second most pressing issue for small businesses, trailing only concerns about labor quality.
On the consumer side, the New York Federal Reserve’s latest survey of consumer expectations revealed that median inflation expectations ticked up 0.1 percentage point at the one-year horizon to 3.1%, while remaining unchanged at 3.0% for both the three-year and five-year horizons. These findings underscore the ongoing debate among economists about whether inflation expectations remain “anchored” and how the Federal Reserve might respond. While some analysts, such as those at Citi, expect inflation to continue slowing despite Trump’s rhetoric, others, like those at BNP Paribas, anticipate that the February data will reflect the impact of Trump’s 10% tariff hike on Chinese goods, alongside persistent inflation in non-shelter services.
The Outlook for Inflation and Interest Rates
The divergence of opinions on inflation’s trajectory has significant implications for monetary policy. Analysts at Citi expect the Federal Reserve to cut interest rates by as much as 1.25% this year, anticipating continued progress in slowing inflation. However, others caution that the economic landscape remains fraught with risks. BNP Paribas analysts pointed to the potential for resilient non-shelter services inflation, driven by seasonal factors, as well as the initial effects of Trump’s tariffs on core goods. These factors could keep inflation higher than expected, complicating the Federal Reserve’s decision-making process.
Conclusion: The Dual Threat of Tariffs and Economic Slowdown
As the U.S. economy navigates the dual challenges of slowing growth and inflationary pressures, the impact of Trump’s tariff policies continues to loom large. While the February CPI report offered some signs of cooling inflation, the broader economic landscape remains uncertain. Small businesses are grappling with rising costs and passing them on to consumers, while consumer expectations of inflation have edged upward. The Federal Reserve faces a difficult balancing act, weighing the need to support a slowing economy against the risk of inflationary pressures. Ultimately, the interplay between tariffs, economic growth, and inflation will shape the trajectory of the U.S. economy in the months to come.
