US inflation was recorded at 2.8% on 12 March, slightly below market expectations, but some fear the figure is the “calm before the storm” ahead of tariff policies coming into play.
The Federal Reserve has maintained a target inflation rate of 2%, but figures have remained well above this target. And as tariff talks continue in the US, many believe another jump in inflation numbers is more likely to come than a drop towards the target.
Lindsay James, investment strategist at Quilter, said rates will now be a “step into the unknown” as focus turns towards tariffs, which have remained contentious.
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“Ultimately, tariffs are an inflationary economic tool and will raise prices for consumers. Whether this is a one-time price change or something more sustained remains to be seen, but Donald Trump was elected in part due to his rhetoric to bring down inflation and make things cheaper,” James said.
“Tariffs are the opposite policy response in order to make this happen and instead risks tipping the US economy into recession. We are already seeing weak data points emerging as a result of the policies of the Trump administration – although other elements do continue to hold up.”
In addition to Trump’s planned tariffs on Canada, Mexico and China, this week a 25% tax on aluminum and steel products was introduced, which will include UK exports.
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AXA IM’s David Page said: “The imposition of tariffs – depending on further scale and persistence – could easily add around 0.5% to ‘core’ Personal Consumption Expenditures (PCE) inflation by the summer, which combined with concerns around inflation expectations we continue to argue will leave the Fed deferring rate cuts beyond current market pricing (we forecast December as the first cut).
“However, with financial conditions tightening sharply, there is an increasing risk that the Fed feels compelled to ease policy to address concerns of a sharp slowdown.”
Currently, the Federal Reserve holds an interest rate of 4.25%-4.5%, and forecasts for a cut have been pushed back in the year since Trump’s election last autumn. However, the Federal Reserve will face a balancing act this year if inflation rises but US jobs data and other recession indicators start to creep up in the US.
Seema Shah, chief global strategist at Principal Asset Management, said: “Certainly, with extraordinarily elevated policy uncertainty weighing on sentiment, retail companies beginning to sound warning bells around consumer spending, and recession concerns spiking, there is a strong likelihood that the Fed put will need to come into play relatively soon.
“However, equities are unlikely to get into full Fed put glee mode. It’s worth remembering that this may be the calm CPI report before the storm. Not only does the Fed need to wait for tariff policy clarity, but once tariff implementation arrives it is likely to bring at least some price increases, with the inflation picture potentially getting uglier as the months go on. The Fed – and markets – are not yet in the clear.”
This story was written by our sister title, Portfolio Adviser
