In early May, the U.S. economy surprised many when inflation dropped to a low 2.1% in April. This dip caught analysts off guard, who had expected a 0.2% increase. This figure is almost exactly the Federal Reserve’s target of 2% and indicates a normalizing of price levels. Fed officials continue to be spooked by anticipated inflation from tariffs originally imposed by president Donald Trump. With these disruptive tariffs, we could lose the progress that’s settling in to stay.
In April, overall inflation was virtually unchanged. This was largely due to the fact that the tariffs they imposed earlier that month had yet to trickle down into consumer prices. The jump comes in a monthly inflation reading that was in line with the Dow Jones consensus forecast. Moreover, the yearly inflation rate fell by 0.1 pp from previous estimates. The Fed doesn’t like surprises and they are quite wary at the moment. Increasing costs, combined with lackluster economic expansion, may trigger stagflation—an occurrence the U.S. has not experienced since the early 1980s.
While inflation continues to tick down, it’s not all good news on the economic front. Consumer spending did even worse, with a measly 0.2% increase this month. Personal income surged by 0.8%, indicating a significant increase from the numbers reported in March. The personal savings rate jumped to 4.9%, its highest level in nearly a year. This is 2.5 times that significant increase from March, where the gap was only 0.6 percentage points.
Tariffs have remained a contentious issue. An international tribunal last week found Trump’s tariffs unlawful. The court ruled that he acted without authority and could not demonstrate that national security was threatened by trade conflicts. This administrative defeat casts further doubt on the sustainability of the tariff policy. This would likely have harmful effects on inflation and the future health of the economy.
Trump has urged the Federal Reserve to consider lowering its key interest rate in light of the shifting inflation landscape, hoping that such measures might stimulate economic activity. With inflation seemingly coming back in line with the central bank’s 2 percent target. Second, the causal link between tariffs and consumer prices remains an area of concern for economists and the general public alike.