Despite Donald Trump’s announcement, the prices of everyday items, including groceries and coffee, continue to rise, one of the main reasons being the US President’s new tariffs.
WASHINGTON: Inflation has risen in three of the past four months and is up slightly more than it was a year ago, when it helped sink then-Vice President Kamala Harris’ presidential campaign. Yet you wouldn’t know it from listening to President Donald Trump or some of the Federal Reserve’s inflation warriors.
“Grocery prices are down, mortgage rates are low, and inflation has been defeated,” Trump told the United Nations General Assembly late last month.
And in a high-profile speech in August, before the Fed cut its key interest rate for the first time this year, Federal Reserve Chairman Jerome Powell said, “Inflation, although still somewhat elevated, has come down well from its post-pandemic highs. Upside risks to inflation have receded.”
Yet dismissing or even reducing inflation while it is still above the Fed’s 2% target poses a major risk for the White House and the Federal Reserve. For the Trump administration, it could find itself on the wrong side of a powerful issue: Surveys show that many Americans still see high prices as a major burden on their finances.
The Fed is perhaps taking an even bigger gamble: It has cut its key interest rate on the assumption that the Trump administration’s tariffs will only temporarily boost inflation. If that turns out to be wrong, if inflation gets worse or stays elevated for longer than expected, the Fed’s credibility in fighting inflation could suffer.
That credibility plays a crucial role in the Fed’s ability to keep prices stable. If Americans are confident that the central bank can control inflation, they will not take actions, such as demanding sharply higher wages when prices rise, that can fuel inflation. Companies often raise prices to offset higher labor costs.
But Karen Dion, a senior fellow at the Peterson Institute for International Economics, said this week that with memories of pandemic-era inflation still fresh and tariffs raising the price of imported goods, consumers and businesses may begin to lose confidence that inflation will remain low.
“If that proves to be the case, in hindsight it would be that the Fed cutting — and I expect more — would be seen as a mistake,” said Dion.
So far, the Trump administration’s tariffs have not lifted inflation as many economists had expected earlier this year. And it is well below its 9.1% peak three years ago. Still, consumer prices rose 2.9% in August from a year earlier, up from 2.6% at the same time last year and above the Fed’s 2% target.
The government is scheduled to release its September inflation report on Wednesday, but the data will be delayed due to the government shutdown.
The tariffs have raised the price of many imported items, including furniture, appliances and toys. Overall, the price of durable manufactured goods rose about 2% in August from a year earlier. That was a modest gain, but it comes after nearly three decades during which the price of such items had largely fallen.
The cost of some everyday items is still rising faster than before the pandemic: Grocery prices rose 2.7% in August from a year ago, the biggest gain outside of the pandemic since 2015. Coffee prices have risen about 21% in the past year, in part because Trump imposed a 50% tax on imports and a 50% tax on exports. Climate change-induced drought has reduced the coffee bean harvest.
Most Fed officials are still concerned that inflation is too high, according to minutes of its Sept. 16-17 meeting. Yet they still chose to cut their key interest rate, because they were more concerned about the risk of rising unemployment than high inflation.
But the concern for some economists is that the ongoing rollout of tariffs and the fact that many companies are still implementing price increases in response could result in only a temporary boost to inflation.
“It’s a big gamble after what we’ve been through … to count on it being transient,” said Jason Furman, a Harvard University economist and former top adviser to President Barack Obama. “At one time, (3% inflation) was considered really high.”
Just two weeks ago, Trump imposed new tariffs on a range of products, including 100% on pharmaceuticals, 50% on kitchen cabinets and bathroom vanities, and 25% on heavy trucks. On Friday, he threatened to “massively increase tariffs” on imports from China in response to that country’s restrictions on rare earth exports.
Some companies are still raising prices to offset tariff costs. Duties on steel and aluminum imports have increased the cost of cans used by Campbell Soups, prompting the company’s CEO to say in September that it would implement “surgical pricing initiatives.”
Chris Butler, CEO of National Tree Company, the nation’s largest seller of artificial Christmas trees, says his company will raise prices on its trees, garlands and garlands by about 10% this holiday season to offset the cost. About 45% of its trees are made in China, with the rest coming from Southeast Asia, Mexico and other countries. The labor and real estate costs to make them in the United States are too high, he said.
Butler also expects artificial trees and decorations to be in short supply this year, which could push up industry-wide prices even further, as much of the production in China was halted when tariffs on that country hit 145% earlier this year. Production resumed but at a slower pace after Trump lowered the duty to 30%.
Butler has forced his suppliers to pick up some of the cost of the tariffs, but they won’t pay all of it.
“At the end of the day, we can’t absorb all of it and our factories can’t absorb all of it,” he said. “So we’ve had to pass some of the excess on to customers.”
Many Fed policymakers are aware of the risks. Jeffrey Schmidt, president of the Federal Reserve Bank of Kansas City, which votes on interest rate decisions, said on Monday that higher inflation caused by a loss of confidence in the central bank is harder to fight than other price increases resulting from supply disruptions.
“The Fed must maintain its credibility on inflation,” Schmidt said. “History shows that while all inflation is universally disliked, not all inflation is equally costly to fight.”
Still, some Fed officials say other trends are offsetting the impact of the tariffs. Fed Governor Stephen Miran, whom Trump appointed ahead of the central bank’s September meeting, said Tuesday that a continued slowdown in rental costs should dampen underlying inflation in the coming months. And a sharp drop in immigration as a result of the administration’s clampdown will dampen demand, he said, cooling inflationary pressures.
“I’m more sensitive about the inflation outlook than many other people,” he said.
