Tariff inflation is apparent everywhere, except in consumer prices
The Consumer Price Index (CPI) for April was somewhat surprising. Initially, there were expectations that the new tariffs introduced by the Trump administration wouldn’t spike inflation.
With the announcement of universal tariffs of 10% affecting over 60 countries on April 2, it seemed probable that we’d see some noticeable price increases on imported goods soon. Or so the theory suggested.
But the CPI indicates otherwise.
Inflation was recorded at just 0.2%. Core inflation, which excludes food and energy, remained steady at 0.2% as well. Year-over-year, the overall item indexes slowed to 2.3%, marking the lowest rate since February 2021.
What about the goods anticipated to be hit hardest by these tariffs?
- Apparel prices decreased, including a 1.1% drop in infant and toddler clothing and a 0.2% decline in April.
- Prices for clocks, lamps, and home decor fell by 1.1%.
- Food prices also dropped by 2.6%.
- Tools, hardware, and outdoor equipment saw a slight increase of just 0.1%.
- TV prices fell by 2.1%.
- Prices for toys, games, hobbies, and playground equipment went down by 0.3%.
- Smartphone prices saw a decline of 0.6%.
- Home furniture prices increased only slightly, by 0.2%.
The automotive industry, which significantly relies on foreign parts and vehicles, didn’t experience the expected price surge either. New vehicle prices remained unchanged in April, while used car prices dropped by 0.5%. Although auto insurance has risen, up 0.6% in April and 6.4% year-on-year, that’s more related to domestic costs than trade issues.
If tariffs were supposed to drive prices up quickly, this industry should have been one of the first to show those signs. Yet, it hardly budged.
What does this mean?
Interestingly, certain prices did rise in the April CPI. Shelter prices increased by 0.3%, which encompasses rent and the owners’ equivalent rent. Home furniture and supplies saw a 0.2% rise, possibly due to greater housing demand. Notably, new home sales surged by 7.4% in March, with furniture store sales increasing by 7.7%. This seems more related to domestic supply rather than imports or tariffs.
There was also a rise in computer and appliance prices. Tariffs might have played a role in these increases, but it’s also possible that demand was boosted. Retail sales in March showed a 1.8% rise in electronics and appliance stores. Even if tariffs did push prices up in these areas, it appears to have been balanced by declines elsewhere.
In essence, what we’re witnessing amounts to some relative pricing shifts rather than any significant increase in overall price levels.
“Just wait” – but for how long?
Analysts on Wall Street are scrambling to make sense of this. They often argue that tariff effects on retail prices can take a while—sometimes up to six months—to manifest. That could be valid. However, it’s worth recalling the Federal Reserve mentioned this didn’t happen during the last instance.
In a recent paper, a Fed economist highlighted that goods impacted by tariffs typically see price increases within two months. The adjustments to consumer prices were noted as “nearly complete” and “rapid.” Therefore, the April CPI showing little change was unexpected.
One possible explanation is stock levels. Retailers and wholesalers might have restocked their inventories before tariffs took effect. This could cushion price pressures in the short run. It suggests that expected tariff impacts may not hit as hard as anticipated, giving businesses time to adapt.
This raises some alternative points. Tariffs don’t halt the market; they redirect it. For instance, if Chinese clothing becomes more expensive, retailers can source from Vietnam or Bangladesh instead. If auto parts are hit with tariffs, manufacturers might switch to suppliers in Mexico, Canada, or even the U.S. Over time, the supply chain adjusts to navigate around tariff barriers. The long-term results might actually lead to a more resilient market with less dependency on imports.
If price pressure remains low into May and June, it suggests tariff effects for 2025 are being absorbed, bypassed, or countered. This would be a surprise to economists and offer evidence for those arguing that tariff strategies can be effective without leading to inflation.
However, should prices rise next month, you can expect the same analysts who predicted a delay to tweak their forecasts.
This marks three months in a row where inflation predictions have been overestimated, suggesting analysts may have anticipated more pronounced tariff effects than reality. When analysts and some media emphasize that higher import tariffs will significantly strain consumers, it recalls the tariff anxieties from the early Trump administration.
They were mistaken then, and they might be mistaken now.
