"New Fed Correspondent": April's CPI Did Not Reflect Tariff Impact; Inflationary Pressures to Emerge in the Following Months

US President Trump has once again urged the US Fed to cut interest rates, but Nick Timiraos, a seasoned Fed reporter known as the "Fed's Wall Street Journal," has poured cold water on the idea. He believes that the impact of tariffs on pushing up inflation has not yet been reflected in the recently released CPI data, suggesting that the Fed should wait and observe changes in upward inflationary pressures as new data becomes available.

On Tuesday, May 13, Eastern Time, Trump posted on his social media platform calling for the Fed to cut interest rates, reiterating that there is no inflation.

Trump's post read: "No inflation, and prices for gasoline, energy, groceries, and almost all other goods are falling! The Fed must lower interest rates," just as central banks in Europe and elsewhere have already done. He once again singled out Fed Chairman Powell, who has been dubbed "too late," asking what went wrong.

Also on Tuesday, a report co-authored by Timiraos began by stating,that inflation in April was mild, but economists believe that tariffs will end the recent period of low inflation and push up prices in the coming months.

The report emphasized the complexity and uncertainty in April's CPI inflation data, arguing that while current inflation data is relatively mild, the full impact of tariff policies has yet to be felt.

This uncertainty will have implications for businesses, consumers, and policymakers. Businesses need to carefully assess the increased costs due to tariff policies and develop response strategies. Consumers may face upward pressure on prices. The Fed, on the other hand, needs to find a balance between inflation and economic growth, carefully formulating monetary policy. The report used an analogy:

"For the Fed, April's inflation data will be seen as observing clear skies before an impending storm, with the amount of rainfall still highly uncertain."

April's Inflation Performance Moderate; Tariff Impact May Surface in Coming Months

April's inflation data showed some positive signals. As mentioned earlier, the CPI rose 0.2% MoM in April, in line with market expectations. More optimistically, the annual inflation rate fell to 2.3%, lower than the 2.4% previously predicted by economists. The significant YoY decline in gasoline prices also played a positive role in controlling inflation. These data undoubtedly brought some relief to the market.

However, behind the optimism lies concern. As Andy Schneider, a US economist at BNP Paribas, said: "You can't be too optimistic about this report."

Timiraos's report quoted Oliver Allen, a US economist at Pantheon Macroeconomics, as commenting that the tariffs announced by the Trump administration in April made it difficult to notice that the YoY growth rate of CPI in April had fallen to its lowest level since February 2021.

"It's not entirely insignificant, but the massive (tariff) shock is coming, we just haven't felt it yet."

In summary, although inflation data has been moderate so far, the impact of tariffs may gradually emerge in the coming months.

Tariff Policy "Rollercoaster": The US Fed Has Little Reason Not to Wait and See

April was a month of extreme instability in the Trump administration's tariff policy. The White House's erratic policies forced companies to scramble to adjust their response strategies. This "rollercoaster" tariff policy has brought great uncertainty to businesses. Many companies find it difficult to formulate long-term business plans. Michael Gapen, chief US economist at Morgan Stanley, said, "The goods on store shelves today are based on agreements made two to three months ago."

According to Timiraos' report:

"April's inflation data gave Fed officials little reason to change their wait-and-see stance as they brace for cost increases or distortions with tariffs fully in effect."

Market Reaction: Wait-and-See Approach

In response to April's inflation data and the uncertainty surrounding tariff policies, the market reacted cautiously. The Dow Jones fell slightly, while the S&P 500 rose. Reports suggest that this indicates investors believe it is too early to assess the full impact of the Trump administration's tariff policies.

The day before, on Monday, US stocks surged after China and the US announced a consensus to reduce tariffs during high-level economic and trade talks.

According to Xinhua News Agency, a spokesperson for the Ministry of Commerce stated that substantial progress was made during the high-level economic and trade talks between China and the US, with a significant reduction in bilateral tariff levels. The US side canceled tariffs imposed on 91% of goods, and China correspondingly canceled retaliatory tariffs on 91% of goods. The US side suspended the implementation of 24% "reciprocal tariffs," and China also suspended the implementation of 24% retaliatory tariffs accordingly.

Timiraos' report suggests that for the US Fed, April's inflation data does not prompt a change in its "wait-and-see" stance. Fed officials are preparing for the impact of tariffs, which are expected to lead to cost increases or market distortions.

Uncertainty Looms Over the Future

The trajectory of inflation remains uncertain in the coming months. Timiraos' report suggests that

"if the Trump administration had not implemented widespread tariff measures in April, the current inflation data might have been sufficient to prompt the Fed to resume interest rate cuts . Costs may rise in the coming months, potentially keeping the Fed on the sidelines until officials are confident that businesses will not continue to raise prices."

The report also mentioned that prices of some tariff-related goods have already started to rise, such as furniture, car parts, and audio equipment. Meanwhile, the drop in airfare prices may suggest that consumers are postponing their vacation plans.

Many businesses are still trying to avoid passing on tariff costs to consumers, partly because they are uncertain about the final tariff levels that Trump will implement. Economists expect that the peak impact of tariffs may not arrive until summer.

Economists at Goldman Sachs recently wrote in a report, "The early stockpiling of inventory this time may moderately delay the transmission of higher prices to consumers."