Inflation slowed considerably last month — but new tariffs on China could trigger another wave of price hikes as President Trump’s tumultuous trade war continues to cloud the economic outlook.
On Thursday, the White House confirmed that China’s total tariff rate is actually 145%, higher than the 125% previously reported. Despite Trump’s 90-day pause on reciprocal tariffs for non-retaliatory countries, that increase has pushed the overall US average effective tariff rate to 27% — the highest level since 1903.
That run-up is likely to trickle through to the US consumer, according to economists.
“If, in the short run, we have a big pullback in the supply of goods, that could show up in higher consumer prices,” Claudia Sahm, former Federal Reserve Board economist and current New Century Advisors chief economist, told Yahoo Finance in an interview on Thursday. “T-shirts could be the new eggs here shortly.”
On Thursday, the latest data from the Bureau of Labor Statistics showed annual core prices rose at their slowest pace since March 2021 last month, while monthly CPI prices fell for the first time since May 2020.
“It’s a very good print,” Joe Brusuelas, chief economist at RSM, told Yahoo Finance shortly after the release. “The unfortunate thing is that because the tariffs are on the way, this is the last clean [inflation] print we’re going to see before we get those tariff-induced inflation increases.”
Even with the 90-day global pause, the sharp rise in US tariffs against China could significantly raise costs unless supply chains are redirected to other countries. That keeps inflation risks elevated for the foreseeable future, although it’s unclear just how aggressive it will be or just how long it will take to show up.
Read more: What Trump’s tariffs mean for the economy and your wallet
“These are uncharted territories for us in recent times,” Sahm added. “And to see how that shows up in inflation is just — it’s quite uncertain how that happens.”
Uncertainty has been the word “du jour” as political turmoil threatens to upend the future of the global economy. And despite a US labor market that’s largely held up, Wall Street remains on edge that shifting trade dynamics could induce a self-inflicted recession.
One of the biggest concerns is stagflation, where growth stalls, inflation persists, and unemployment rises. Risks of that scenario have shown up more firmly in Wall Street’s projections following a string of disappointing data releases, along with the administration’s latest trade shocks and other policy unknowns, like recent efforts to cut government jobs from Elon Musk’s Department of Government Efficiency (DOGE).
All of these risks have kept the Fed in “wait-and-see” mode when it comes to interest rates.
“In all likelihood, tariffs will trigger a surge in inflation,” Seema Shah, chief global strategist at Principal Asset Management, wrote on Thursday. “The Fed ultimately has no room for complacency, so rate cuts may be fairly constrained. We anticipate three to four cuts this year, with a severe labor market slowdown or simmering systemic risks the only factors to drive a more aggressive response.”
So far, Federal Reserve Chair Jerome Powell has made it clear the central bank is in no hurry to adjust its interest rate stance given the risks.
“It is too soon to say what will be the appropriate path for monetary policy,” Powell said during remarks delivered last week. “We are well positioned to wait.”
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at [email protected].
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