Here comes the tariff inflation

Just a few weeks back, I penned a Money Matters article titled, “Where is the tariff inflation?”

In that article, I detailed that inflation statistics, since the implementation of the tariffs, had, for the most part, failed to show any significant rise in the general prices of goods and services.

I argued although tariff-driven inflation had yet to be seen in the US, due to the mechanics of how tariffs and their time frames work in an economy, prices would certainly soon be on the rise.

The apparent lack of any real inflation initially, however, led many news anchors and analysts to claim the tariff inflation threat was a no-show. Indeed, the stock market, having fallen hard on the initial announcements of the Trump tariffs, rallied into the summer as various inflation price indexes remained fairly stagnant.

In mid-summer, employment statistics began to hint at a weakening in the economy, and with inflation apparently tepid, Washington started to press the Federal Reserve (FED) to lower interest rates.

Claiming inflation was a nonevent, with the jobs data showing a possible slowing in the economy and company earnings beginning to decelerate in the latest reporting quarter, President Trump turned up the heat on FED Chief Jerome Powell to act. Powell, however, kept rates the same and continues to do so, claiming tariff inflation is yet to be seen and the threat is not over.

As recently as last week, on Aug. 13, another inflation measure, the consumer price index (CPI), came in at a Fed-tolerable 2.7-percent year-over-year (YOY) increase, which matched the rosy expectations of market analysts. The Dow rose 1.1 percent, about 463 points. The buying was spurred by hopes the FED, seeing a slowing economy and little inflation, would soon start cutting rates. Lowering interest rates historically pulls buyers into the markets.

Although the markets celebrated the 2.7-percent CPI data, only one day later, on Aug. 14, the producer price index (PPI) came out. The PPI is what producers pay for stuff, which they make into other stuff, and then sell it to the stores we all go to. In other words, it’s stuff in the pipeline and soon to hit store shelves along with their new prices.

Although the PPI was expected to come in at another sleeper figure of .2-percent YOY, it was more than four times that at an eye-popping .9%.

Whoops!

The .9-percent figure is the worst since 2022, which was right about the time they let us all out from the COVID shutdowns and we all went on a spending spree. With the additional lack of supply from those very same shutdowns, coupled with all that free money from all those government checks we got that we couldn’t spend during the lockdowns, crushing demand met up with limited supply driven by crack cocaine amounts of saved-up money.

And KABLAMO! Wallet-obliterating inflation ran wild.

2022 and 2023 saw that massive inflation we all witnessed and complained about.

The PPI posted last week hadn’t been that high since those fun times.

Now everybody is scratching their head and all the aisle ushers are saying, “Move along, there is nothing to see here.”

Well, there is something to see, and no amount of smoke and mirrors will bullet-proof consumer wallets when what I think is coming, comes.

As detailed in July’s article, tariff-driven inflation is slow to make it through the supply pipelines. But it will and likely has started to. You just can’t put 20-, 30- or even 50-percent taxes (tariffs) on stuff and expect inflation not to rise, and rise significantly.

The fact remains Trump was inaugurated just a little more than seven months ago. He didn’t enact tariffs for another month. That equates to six months since the start of the tariffs. And that is about the minimum amount of time it takes to fill the pipeline with new stuff from abroad, if that.

It’s likely going to be another three to six months, or even more, to feel the full effects of the tariffs on consumer prices.

We have not escaped the tariff inflation, as some would have you believe. It is only just beginning. And when inflation starts to accelerate even more, as the PPI is hinting to, the FED will not cut interest rates. It can’t. Doing so would only amplify the inflation even more.

And back into the lovely box the FED will find itself. A stagnating economy begging for lower rates, and an inflation monster champing at the bit, salivating at the thought of them.

This article expresses the opinion of Marc Cuniberti and is not meant as investment advice, or a recommendation to buy or sell any securities, nor represents the opinion of any bank, investment firm or RIA, nor this media outlet, its staff, members or underwriters. Mr. Cuniberti holds a BA in Economics with honors, 1979, and California Insurance License #0L34249. His insurance agency is BAP INC. insurance services. Email: [email protected]