September’s surprise inflation report has sent shockwaves through the economic and financial communities. They criticize the overall quality of its data, too. In fact, almost 40% of the data reported to generate the report was imputed making this year’s findings more untrustworthy than average. Future inflation expectations over the next year have markedly dropped by nearly half a percentage point since early October. This sharp drop only compounds the current uncertainty in this volatile economic landscape. The pace at which this decline has happened recently has alarmed many financial pundits who have begun to track short-term inflation expectations with bated breath.
These tariffs enacted starting last July have been very influential in changing the dynamics of inflation. These tariffs are, as of now, an average of 6 percentage points lower than they stood in early April. Most of them went into effect at the start of August. The next round of reductions in bound tariffs will be especially significant in its effect. We anticipate an easing from the inflation shock coming out of year-on-year comparisons in August and September of next year, which will further depress the inflation rate artificially.
The ongoing US government shutdown is impacting the publication of this data. This significantly hampers our ability to understand the current economic picture. The shutdown has already prevented releases of new data since early October making it harder for anyone to track inflation trends with accuracy. Sound figures are fundamental to evaluating the impact of tariff increases on US prices. Greater understanding of the public and disciplined Central Bankers should eventually move inflation expectations toward realistic levels.
Economists are especially focused on how these developments will affect inflation expectations going forward. Most of the US’s larger trading partners have made similar agreements in recent months that cement tariffs at levels between 15–20%. This newfound stability may allow us to get a better sense of inflation trends over the next few months. Analysts think that the transitory, for now, nature of the present inflation shock is mostly weighing on expectations.
Michael Pfister, an economist, remarked on the evolving landscape of inflation expectations:
“Over the summer, I often wondered when we would see a decline in short-term expectations, i.e., those in one year’s time. Even if expectations remained unchanged, this would, by definition, mean that market participants were shifting the inflation shock further into the future. This would raise questions about how transitory this tariff-induced inflation shock really is.” – Michael Pfister
In particular, the expectation of a one-time inflation shock could cause all market participants to update their priors away from the Fed’s stated commitment toward price stability. With short-run inflation predictions ever-changing, economists warn against ignoring what expectations can tell you. Understanding how tariffs and other economic factors interact is essential for forming a comprehensive view of the current economic landscape.