Trump Declares Victory over Inflation but Admits Prices Still Bite
Inflation has increased in three of the last four months and is marginally higher than it was a year ago, when it contributed to the decline of then-Vice President Kamala Harris’ presidential campaign. However, one might not discern this from the statements made by President Donald Trump or certain members of the Federal Reserve who are addressing inflation. Trump addressed the United Nations General Assembly late last month, stating: “Grocery prices are down, mortgage rates are down, and inflation has been defeated.” During a prominent speech in August, shortly before the Federal Reserve lowered its key interest rate for the first time this year, Federal Reserve Chair Jerome Powell stated: “Inflation, though still somewhat elevated, has come down a great deal from its post-pandemic highs.” The potential for inflation to rise has lessened. However, disregarding or minimizing inflation while it remains above the Fed’s target of 2 percent presents significant risks for both the White House and the Federal Reserve. For the Trump administration, it may find itself on the wrong side of a significant issue: Surveys indicate that many Americans continue to view high prices as a considerable burden on their finances. The Fed may be taking an even bigger gamble: It has cut its key interest rate on the assumption that the Trump administration’s tariffs will only cause a temporary bump up in inflation. If that proves to be incorrect, should inflation worsen or persist at elevated levels for an extended period, the Federal Reserve’s credibility in combating inflation may suffer.
The credibility of the Fed is essential for maintaining price stability. If Americans trust that the central bank can manage inflation effectively, they are less likely to take actions like insisting on significantly higher wages in response to rising prices, which could trigger an inflationary spiral. Companies frequently raise prices to counterbalance increased labor costs. However, Karen Dynan remarked this week that with the memories of pandemic-era inflation still vivid and tariffs increasing the cost of imported goods, consumers and businesses might begin to lose confidence in the persistence of low inflation. “If that proves to be the case, in hindsight it will be that the Fed cuts – and I do expect several more — are going to be seen as a mistake,” Dynan said. Thus far, the tariffs imposed by the Trump administration have not resulted in the inflation increase that many economists anticipated earlier this year. It continues to be significantly lower than its peak of 9.1 percent reached three years ago. Consumer prices rose 2.9 per cent in August compared to a year prior, an increase from 2.6 per cent during the same period last year, surpassing the Fed’s target of 2 per cent. The government is set to release the September inflation report on Wednesday; however, the data is likely to be postponed due to the government shutdown. Tariffs have increased the prices of numerous imported goods, such as furniture, appliances, and toys. In August, the cost of durable manufactured goods increased by nearly 2 percent compared to the same month last year. It was a modest gain, yet it follows nearly three decades in which the prices of such items predominantly decreased.
The cost of some everyday goods continues to rise at an accelerated pace compared to pre-pandemic levels: Grocery prices increased by 2.7 percent in August compared to the previous year, marking the largest gain, excluding the pandemic period, since 2015. Coffee prices have surged nearly 21 per cent over the past year, driven in part by Trump’s imposition of 50 per cent import taxes on Brazil, a major coffee exporter, as well as the impact of climate change-induced droughts that have diminished coffee bean harvests. According to the reports, most Fed officials remain worried that inflation is excessively high. Nevertheless, they opted to reduce their key interest rate, prioritizing concerns over the potential increase in unemployment over the threat of rising inflation. However, some economists are worried that the continued implementation of tariffs, along with the ongoing price increases by many companies, could lead to more than just a short-lived rise in inflation. “It is a big gamble after what we’ve been going through … to count on it being transitory,” said Jason Furman. Once upon a time, 3 per cent inflation would have been regarded as exceptionally high. Just two weeks ago, Trump imposed new tariffs on a variety of products, including 100 per cent on pharmaceuticals, 50 per cent on kitchen cabinets and bathroom vanities, and 25 per cent on heavy trucks. On Friday, he issued a warning of a significant rise in tariffs on imports from China as a reaction to that nation’s limitations on rare earth exports. Several companies continue to increase prices in order to counterbalance the costs associated with tariffs. Duties on steel and aluminium imports have increased the cost of the cans utilized by Campbell Soups, prompting the company’s CEO to state in September that it will execute surgical pricing initiatives.
Chris Butler states that his company will increase prices by approximately 10 percent this holiday season on its trees, wreaths, and garlands to counteract tariff costs. Approximately 45 percent of its trees are sourced from China, while the remainder comes from Southeast Asia, Mexico, and various other nations. “The cost of labour and real estate is too high to make them in the United States,” he said. Butler also anticipates a decrease in the supply of artificial trees and decorations this year, which could drive up prices across the industry, as most production in China was halted when tariffs on that country reached 145 percent earlier this year. Production resumed following Trump’s reduction of the duties to 30 percent, albeit at a slower pace. Butler has urged his suppliers to take on a portion of the tariff costs, yet they are unwilling to cover the entire amount. “At the end of the day, we can’t absorb the entirety of it and our factories can’t absorb the entirety of it,” he said. Consequently, we have had to convey some of the increases to consumers. A significant number of Fed policymakers recognize the potential risks involved. Jeffrey Schmid stated on Monday that high inflation stemming from a loss of confidence in the central bank is more challenging to combat than other price increases, such as those caused by supply disruptions. “The Fed must maintain its credibility on inflation,” Schmid said.
History has demonstrated that although all inflations are generally unwelcome, the costs associated with combating them can vary significantly. However, certain officials from the Fed assert that other trends are counterbalancing the effects of tariffs. Fed governor Stephen Miran stated on Tuesday that a consistent decline in rental costs is expected to lower underlying inflation in the upcoming months. He stated that the sharp drop in immigration due to the administration’s clampdown will reduce demand, thereby cooling inflation pressures. He expressed a more optimistic view on the inflation outlook than many others do.
