In a context where the macroeconomic environment seems to change almost weekly, depending on the US president's tariff announcements, it is becoming very difficult for economists to make forecasts. One of the most complicated areas is undoubtedly US inflation.

Soft data vs hard data

The starting point is a disinflationary trend that has enabled the Fed to begin its cycle of rate cuts in September 2024. However, since the beginning of the year and Donald Trump's return to the White House, everyone has been worried about the consequences of the US president's trade policy on prices.

What we can say at this stage is that surveys show that these fears are very much present among consumers. Inflation expectations have risen sharply since the beginning of the year. On Friday, the University of Michigan's confidence survey reported inflation expectations at their highest since 1981, at 7.3%. This figure should be qualified by noting that the survey was conducted before the announcement of the 90-day pause in the trade war between the US and China on April 12, which marks a clear easing of tensions.

Despite rising inflationary expectations, inflation statistics show that the trend towards disinflation is continuing. Last week's statistics – CPI (consumer prices) and PPI (producer prices) for April – were even lower than expected.

Of course, these figures relate to the past and the impact of tariffs on prices is yet to be seen. However, it should not be forgotten that it is the prices of goods that will be affected and that the price index is mainly composed of services.

Services include the main component of the CPI: housing, which accounts for 35% of the index. However, this is a component that is subject to considerable inertia, and leading indicators – such as the Cleveland Fed's series of new rents – point to continued disinflation.

CPI and housing component of the CPI. Source: Bureau of Labor Statistics

And if consumers start to slow down, as suggested by the decline in confidence in surveys, this is also likely to put downward pressure on the rest of the services sector.

Another positive factor for easing inflation is the decline in oil prices. In the April inflation index (CPI), gasoline prices are down 11.8% year-on-year.

It remains to be seen how companies will react to the tariffs. However, the latest NFIB survey of small businesses showed that the proportion of companies currently raising prices has fallen to 25% from 31% in February, while those expecting to raise prices in the next three months now stands at 28%, down from 30% two months ago.

Political pressure

Companies are all the more cautious about raising prices as the White House begins to push for tariff increases to be absorbed by corporate margins so as not to impact consumers, who are also voters.

This is what we saw this weekend with Walmart. It all started last week, when the retailer announced its quarterly results, saying that it would be forced to raise prices to offset the impact of tariffs. This was a reversal from the company's previous statement that it would absorb a large portion of the associated additional costs in order to wage a price war and gain market share.

Walmart CEO Doug McMillon said: "We will do our best to keep prices as low as possible, but given the magnitude of the tariffs, even at the reduced levels announced this week, we are not in a position to absorb all of the pressure given the reality of reduced margins in the retail business." In an interview with CNBC, CFO John David Rainey estimated that consumers will begin to see prices rise at the end of May and certainly in June.

The announcement prompted a response from Donald Trump, who posted the following message on Truth Social: "Walmart must STOP pretending that tariffs are the reason for price increases across the board. Walmart made BILLIONS OF DOLLARS in profits last year, far more than expected."

The US president believes that companies should absorb the tariff increases in their margins: "Between Walmart and China, they should, as they say, 'ABSORB THE TARIFFS' and not pass anything on to their precious customers."

Fed caution

That is the crux of the matter: how much of the tariffs will be paid by companies, through lower margins, and how much will be passed on to consumers. What is certain is that US companies, especially the largest ones, will put pressure on their Chinese suppliers to lower their prices, and will themselves be under pressure from the White House if they try to raise prices.

Furthermore, the final level of customs duties has not yet been set. Only an agreement with the United Kingdom has been reached. However, for other countries, only a pause has been declared—until August 12 with China and July 9 with other countries—and negotiations are ongoing.

Several factors therefore point to inflation remaining subdued. But as long as there are fears of a resurgence of inflation, the Fed must maintain a fairly firm stance and cannot resume rate cuts. This aims to keep inflation expectations anchored. Rather than surveys such as the Michigan survey, the Fed is paying more attention to market measures such as the 5-year, 5-year forward inflation expectation rate, which has risen slightly but remains around 2.3%.


https://www.marketscreener.com/news/latest/United-States-and-what-if-the-inflationary-wave-doesn-t-happen-49998337/