Thursday’s inflation numbers are likely to show inflation cooling, but with the report dropping just a day after President Donald Trump’s norm-shattering tariffs are scheduled to take effect, it will likely be cold comfort for investors and consumers trying to navigate a post-free trade era.
- Lower inflation (but don’t expect much celebration)
Economists predict that Thursday’s report from the Bureau of Labor Statistics will show consumer prices increasing around 2.5% over the last 12 months, according to a survey of economists by Bloomberg. This would represent a drop from 2.8% the previous month. Month-on-month inflation is expected to be between 0.1% and 0.2%, at or slightly below March.
In normal times, this would be reason to cheer. But with President Trump’s tariffs upending markets, the response will likely be more muted this time around.
- Tariffs have upset world trade, but we may not see the full effects yet…
Trump’s tariffs announcement last week landed like a nuclear bomb, leading markets to meltdown while foreign governments scrambled to negotiate last-minute deals. While economists widely agree that tariffs will lead to higher inflation, it may be too early to see that in this month’s report.
“It predates the April 2nd tariff tsunami,” said Christopher Low, chief economist at FHN Financial. “In April and May, we expect there to be price increases.”
- …Although some companies might already be pricing them in
Although the full shockwave of Trump’s tariffs likely won’t have had time to ripple through the economy, we may get hints of what’s to come.
This will be the first CPI report to come out since Trump’s more limited tariffs on China, Mexico, and Canada were instituted at the start of March. That means we could see higher prices on some imported products, including consumer durable goods, like appliances and electronics, and apparel items like clothing.
Some companies may already be raising prices in anticipation of what’s to come.
“Retailers were aware that higher tariffs were being set on goods of prices from China,” said Jonathan Millar, a senior economist at Barclays Capital. “We could see early signs of retailers passing through the costs of some of the tariff-affected items to consumers.”
- Your breakfast (and the drive to get it) might get cheaper
Food and energy are two areas where analysts expect positive inflation numbers, continuing a trend we saw in the March report. This will come as relief for consumers who’ve felt the strain of record-high egg and beef prices.
Energy prices are also expected to soften. In February, gasoline prices were down 3.1% year-on-year while heating oil was down 5.1%, and some analysts believe this will continue in the April numbers. This is good news for consumers and most businesses – and for Trump, who has promised to bring down energy prices. But this may be a bad omen for oil producers. U.S. crude oil prices are down 15% since last Wednesday, and many oil producers are worrying that low prices will hurt business.
- Powell may be feeling the pressure, but don’t expect the Fed to relax anytime soon
Even if Thursday’s numbers are positive, it’s unlikely to change the Fed’s mind in the near-term. Speaking last Friday at the annual conference for the Society for Advancing Business Editing and Writing, Fed Chairman Jerome Powell said that the central bank is likely to hold interest rates steady until it has a clearer vision of what’s coming down the line.
“We have stressed that it will be very difficult to assess the likely economic effects of higher tariffs until there is greater certainty about the details,” Powell said. “While uncertainty remains elevated, it is now becoming clear that tariff increases will be significantly larger than expected, and the same is likely to be true of the economic effects, which will be higher inflation and slower growth.”
As Trump’s tariffs take effect in the next few months, the Fed will likely find itself caught between its dual goals of managing inflation while promoting economic growth. Analysts expect that Thursday’s report won’t change their wait-and-see approach.
“Their reaction will be similar to the market reaction,” said Low. “If it’s good, that’s great. But they’re still braced for the impact of global tariffs.”