Why Inflation Is Absent After U.S. Tariffs
When the U.S. introduced punitively high tariffs against its trade partners, experts thought that prices would rise quickly. Instead, since their introduction on April 2, the CPI rate has been muted.
Why is inflation absent?
In May, CPI rose by only 0.1%, when experts expected a 0.2% rate. Data did not show any immediate impact from tariffs. Fed Chair Powell did not cut rates in response to the report.
Inventory Drawdown
Suppliers and merchants potentially sold their inventory of goods that are not subject to tariffs first. It also encouraged buyers to front-load orders. By buying goods before they were subjected to tariffs, they avoided the extra costs. Demand likely fell as a result.
The President’s tariff pause also helped substantially. The announcement of tariffs is not the same as enforcing actual tariffs. When the U.S. tariffs were in effect, they were smaller than initially announced.
By late summer, the impact of tariffs might show up. Companies will need to fill their inventories, which are subject to a tariff of at least 10%. It may choose to absorb the cost or pass it to consumers. Walmart (WMT) already pre-announced that prices would rise. It said it would rise by even more in the weeks that followed.
Investors should continue to bet on the strongest retailers. That includes Costco (COST), Walmart, and in the food sector, Mondelez (MDLZ).
