Tariff inflation has been delayed and partly mitigated by cost absorption and disinflationary offsets, but it should be visible by September.

Frederik Ducrozet, Head of Macroeconomic Research, & Xiao Cui, Senior Economist Pictet Wealth Management.

SUMMARY

• The impact of tariffs on US inflation has not yet materialised in aggregate CPI figures. We believe that tariff-driven inflation has been delayed by a combination of factors, including slow implementation, front-loading of imports, limited cost absorption, and disinflationary offsets, all against the backdrop of slowing economic growth.

• Barring a recession, we expect core goods inflation to increase further in the coming months, but not to the extent that it would prevent the Fed from resuming its easing cycle later this year.

ARE ECONOMISTS GOING TO BE WRONG AGAIN?

US CPI was relatively benign in June for a third month in a row, although core goods rose at a 2.4% annualised rate, the highest in four months. On the surface, it appears that the big tariff shock to consumer prices has not materialised.

When economists come up with explanations such as transmission lags or counter-factuals, one cannot be blamed for being suspicious. Yet we believe that is exactly what is happening. The impact of tariffs on US inflation has been delayed as firms were able to anticipate the shock. It has also been partly mitigated by cost absorp-tion and disinflationary offsetting factors. Tariff inflation may be less dramatic than feared, but we expect it to show up more visibly in the data by September.