Memo from the White House: inflation is “right on track”, it declared this week, citing the latest official data. Price growth is now “very low”, according to Donald Trump. The actual statistics paint a markedly different picture.
Just six months after he regained power, in part by promising to rapidly reduce prices, Trump has presided over the chaotic rollout of tariffs on an array of overseas products that many have argued risk having the exact opposite effect.
After a lull, the consumer price index (CPI) is back on the rise. In June, everything from fruit and washing machines to dresses and toys became more expensive.
Businesses in the US and around the world have struggled to keep up with the Trump administration’s erratic rollout of its aggressive trade strategy: the daily White House soap opera of warnings, threats, confusion, deadlines, delays and drama.
Putting to one side the steady stream of twists, cliffhangers and all-caps declarations, each episode has pushed US tariffs higher. The overall average effective tariff rate is now set to hit 20.6%, according to the non-partisan The Budget Lab at Yale, its highest level since 1910.
Eventually, someone has to foot the bill.
By Trump’s telling, the countries he targets will be forced to pay up. But in reality, tariffs are paid by the importer – US-based companies, in this case – and often passed on.
Tariffs are a burden. One way or another, the impact typically is felt along each link of the supply chain, from the initial manufacturer to the customer who buys the finished product. “All through that chain, people will be trying not to be the ones who pick up the cost,” noted Jerome Powell, the Federal Reserve chair, at a recent press conference.
“But ultimately, the cost of the tariff has to be paid and some of it will fall on the end consumer,” added Powell. “We know that. That’s what businesses say. That’s what the data says from past evidence. So we know that’s coming.”
The effect is not immediate, though. It might take Trump a matter of minutes to announce a tariff on Truth Social, but the full effects can take months to work their way through the economy.
And so Powell, and the Fed, has waited. For seven months now, at four consecutive meetings, the US central bank’s policymakers have sat on their hands and kept interest rates on hold. After dramatically raising rates to combat inflation, they want to see how prices respond to Trump’s tariffs before cutting them back.
It’s early days. Prices are still rising, and by more than the Fed’s target of 2% each year. Officials want to know if Trump’s plan will make them rise faster.
The evidence has so far been mixed. While consumer price growth accelerated slightly between May and June, the annual rate of wholesale price growth slipped. The Fed’s latest “beige book”, a semi-quarterly report of anecdotal economic insights from across the US, also released this week, described a relatively calm business landscape, despite persisting uncertainty.
Assuming Trump’s announced tariffs are enforced, they will dent US economic growth by 0.1 percentage point this year and 0.3 percentage points next, according to modeling by Oxford Economics. “The drag on the economy is predominantly tied to core inflation, which will temporarily be 0.2bps [basis points] higher than in the current baseline,” said its chief US economist Ryan Sweet. “Though the boost to consumer prices is modest, it still reduces growth in real disposable income and, by extension, consumer spending.”
Inside the Fed’s headquarters in Washington DC, Powell and his officials are patiently monitoring the data while deciding their next steps. But less than a mile away, one man is not prepared to wait.
In a series of increasingly bitter attacks, Trump has publicly lambasted Powell for being “too late” to cut rates, and claimed the Fed’s inaction is costing the US economy. He has called on Powell (whom he first tapped to be Fed chair in 2017) to quit, and unnerved Wall Street by raising the prospect of firing him.
Bharat Ramamurti, former deputy director of the National Economic Council under Joe Biden, said: “If you replace Jay Powell with someone who is clearly doing whatever Donald Trump wants them to do, expectations about what inflation is going to do in the long run are going to spike and that’s going to create a real problem for the Fed in the long term.”
The supreme court signaled it views the Fed chair as legally shielded from presidential removal, describing the central bank as a “uniquely structured, quasi-private entity” in a May ruling about two of Trump’s other firings.
Trump is “highly unlikely” to fire Powell, he has asserted, before floating one reason he might have to go: a $2.5bn renovation of the Fed’s buildings. “I mean, it’s possible there’s fraud involved,” the president claimed. Powell has reportedly asked the central bank’s inspector general to review the project.
Powell is due to finish his term in May, and has stressed he will remain in post until then. Advocates of the Fed’s independence insist the more important question is not whether the president can remove him before then, but if he should.
“Once you no longer have the check of the central bank, which can raise interest rates as needed to curb inflation, you really start to raise the specter of runaway costs, runaway inflation, and it makes the US economy less attractive for investors domestically and abroad,” said Ramamurti.
Inflation is “right on track”, according to his administration. Economists are already concerned it is tilting off course – and Trump won’t rule out taking action that critics warn would shunt it off the rails altogether.
