Today’s release of the Federal Reserve’s favorite measure of inflation provides (for June) evidence both for those who argue that …Continue reading →
Today’s release of the Federal Reserve’s favorite measure of inflation provides (for June) evidence both for those who argue that President Trump’s tariff-centric trade policies are fueling lots of inflation, and those (like me), who argue that it’s not. That’s especially true if you look at the various versions of this measure (called the Personal Consumption Expenditures Price Indexes, or PCE) in more detail than usual. And it’s especially important because the Fed, after all, is the main government institution charged with fighting inflation.
Here are the headline PCE numbers since the first full month (February) of the Trump 2.0 administration on a month-by-month basis:
February 0.4 percent
March 0 percent
April 0.2 percent
May 0.2 percent
June 0.3 percent
As you can see, even though Mr. Trump’s tariff-ing intentions were supposed to be clear since he was reelected last November, (and allegedly sparked much panic-buying by consumers and businesses starting then), you can see that monthly headline PCE is still lower than in February. At the same time, it’s trended up – a bit – since March.
The story is similar for headline PCE on a yearly basis. As shown below, it’s also still lower than in February, but has risen since April (at a somewhat faster pace than the month-to-month numbers).
February 2.7 percent
March 2.3 percent
April 2.2 percent
May 2.4 percent
June 2.6 percent
Given that, according to one widely followed calculation, the U.S. average effective tariff rate has risen from 2.4 percent in February to 15.8 percent in June, that’s not a lot of tariff-induced inflation. And although it’s true that big tariff hikes could lie ahead if big economies like China’s, Brazil’s, India’s, and Canada’s don’t reach new deals with the United States, it’s also true that agreements have been announced for countries representing nearly a third of the world economy as of 2023 (not counting China with which Washington has reached a “trade truce”, and many of the nation’s top trade partners.
The same on-the-one-hand-on-the-other arguments can be made for core PCE, which strips out energy and food prices because they’re supposedly volatile for reasons largely unrelated to the economy’s underlying vulnerability to inflation. Here are the monthly results since President Trump’s first full month in office this year:
February 0.5 percent
March 0.1 percent
April 0.2 percent
May 0.2 percent
June 0.3 percent
Something like the “Nike swish” pattern evident for headline price trends is visible here, too. Core PCE dipped through May, and then inched up in June. And the yearly core PCE numbers don’t seem very concerning, either:
February 2.9 percent
March 2.7 percent
April 2.6 percent
May 2.8 percent
June 2.8 percent
Trade in goods dominates total U.S. trade, so maybe that’s where tariff-induced inflation is really showing up? The monthly results, however, show little of the kind:
February 0.2 percent
March -0.5 percent
April 0.1 percent
May 0.1 percent
June 0.4 percent
These price trends have been more up-and-down since February, but the latest (June) figure is still lower than January’s 0.5 percent rate. But goods inflation year-on-year has been almost non-existent since February (although this measure does include energy prices, which are way down):
February 0.4 percent
March -0.3 percent
April -0.4 percent
May 0.1 percent
June 0.6 percent
Incidentally, that June figure has rebounded only to its levels of January.
Adding to the confusion: One of the biggest concerns about tariffs and inflation concerns their possible spread to the services sector. Trade in services is much smaller than trade in goods, but of course services companies use many goods for their operations, many of these goods are imported, and services comprise a strong majority of total U.S. economic activity.
Yet the services PCE data show no “bleed-through” effect, whether on a monthly basis:
February 0.5 percent
March 0.2 percent
April 0.2 percent
May 0.2 percent
June 0.2 percent
or on an annual basis:
February 3.8 percent
March 3.6 percent
April 3.5 percent
May 3.5 percent
June 3.5 percent
But even that doesn’t mean that the nation is out of the tariff-induced inflation woods. For the details of yesterday’s report on economic growth in the second quarter revealed a definite slowdown – which would naturally put a damper on price growth for reasons no one should applaud. But even that doesn’t mean that the nation is out of the tariff-induced inflation woods. For the details of yesterday’s report on economic growth in the second quarter revealed a definite slowdown – which would naturally put a damper on price growth for reasons no one should applaud.
In a late June post, I described the United States as comprising an “Anyone’s Guess” economy. Today’s official figures indicate that the same still applies to the ultimate impact of President Trump’s tariffs on inflation.
