US inflation is the calm before Trump's tariff storm
The latest US inflation data shows a glimpse of what might have been: an inflation rate falling steadily towards the Federal Reserve Board's target, lower interest rates and a growing economy.
Alas, the data doesn't capture the impact of Donald Trump's global trade war, which probably won't start to surface until next month and won't be fully reflected until well into the second half of the year.
The consumer price index for April confirms that, when Joe Biden handed over stewardship of the world's largest economy to Trump in January, the US was in good shape. The economy was growing, until the initial impact of the trade war – a scramble by importers to get in ahead of the tariffs – produced a contraction in the March quarter. Inflation was gradually receding.
The headline inflation rate rose 2.3 per cent in April, the lowest rise since February 2021, when the supply chain shock from the pandemic was about to gather momentum and send prices soaring.
Core inflation – excluding volatile food and energy prices – rose at a 2.1 per cent annual rate over the three months to end-April, marginally above the Fed's 2 per cent target.
That is, of course, old news. Trump announced his main tariff plans – a10 per cent universal baseline tariff of 10 per cent, 'reciprocal' tariffs of up to 100 per cent on the 90-odd countries with whom the US has a trade deficit and 145 per cent on China – on his so-called 'Liberation Day' on April 2, with the tariffs coming into effect a week or so later.
It will be interesting to see how the markets, the Fed and Trump respond when that damage finally surfaces, as it eventually will.
With companies and consumers rushing to get in ahead of the expected price rises – 'front loading' their purchases – the impact of the tariffs was always going to be delayed.
Then Trump paused the reciprocal tariffs for 90 days until July, and then, after last weekend's truce with China, which saw that tariff reduced to 30 per cent and China's 125 per cent retaliatory tariff cut to 10 per cent, paused that confrontation until August.
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