When will tariffs boost US inflation?

Tariffs are rising, but inflation is falling...

Between February and April, US President Trump ordered numerous and, in some cases, drastic tariff increases. Although many of these tariff increases were suspended on April 9 and replaced by a 10% tariff for the time being, the threat of further tariff increases remains. According to calculations by the Yale Budget Lab, the average tariff rate has risen to around 15.8%, which would be a good 13 percentage points higher than the average for 2024. Since around one-tenth of demand in the US is met by imports, the higher tariffs were expected to increase consumer prices by an estimated 1.3%.

However, inflation in the US has not picked up recently, but has actually tended to decline. Excluding volatile energy and food prices, the consumer price index rose by only 1.8% in the three months to May (seasonally-adjusted annualized rate; see title chart). In 2024, this rate was still 3.2%.

... and the Fed is coming under pressure

Despite weaker inflation, the Federal Reserve has not yet lowered its key interest rate, but is keeping the fed funds target range at 4.25%–4.50%, a relatively high level by international standards. Fed Chairman Jerome Powell has justified the Fed's restraint primarily by pointing out that the tariffs would only have a delayed impact on consumer prices. Furthermore, it is not yet clear how high the tariffs will ultimately be. The Fed is therefore waiting until the fog clears. However, the Fed is coming under increasing pressure. President Trump is calling for drastic interest rate cuts and considers Powell's refusal to be “un-American,” and the longer the effects of the tariffs remain unrecognizable, the greater the pressure is likely to become.

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