The bottom line? Inflation is at a crossroads
March consumer inflation was quite tepid, held in check by a sharp decline in energy prices and a continued slowdown in the pace of shelter inflation.
Even so, it’s not backward-looking inflation data that the market is concerned about right now — it’s the near certainty that prices are heading higher in the near term to a degree that’s difficult to gauge.
As consumers brace for the impact of tariffs on prices on a host of staples and discretionary goods, there’s considerable uncertainty on what that near-term magnitude of the impact will be for growth and inflation, although the direction for each is clearer. That’s sent economists scrambling to update their forecasts to lower growth and increase expected inflation for the duration of the year.
As yesterday’s events reaffirmed, tariffs are a moving target. Which countries’ exports will bear the brunt is in flux, as is the timing of their implementation and the actual levies applied.
As such, inflation is at a bit of a crossroads, having fallen in recent months but being poised to seemingly increase in the near term. How much? How quickly? That remains to be seen.
By the numbers: Prices edged only modestly higher last month
The consumer price index edged lower in February, easing by 0.1%, better than forecasts. Core inflation, which excludes more volatile food and energy prices, was up slightly, rising by 0.1%, notably below the 0.3% consensus expectation of economists.
Tepid March inflation pulled down the trailing 12-month results notably as well. Headline CPI declined from 2.8 to 2.4%, while core CPI fell from 3.1 to 2.8%.
Shelter inflation has been a major force in keeping inflation elevated in recent years; if sustained, softer shelter inflation would be good news for Fed policymakers, potential homebuyers, and renters.
However, in the near term, that potential development is likely to be overlooked amid the torrent of developments related to trade policy, tariffs, and the resulting impact on a host of consumer goods.
Consumer reaction and economic impact? To be determined
Plenty of questions about the path ahead remain and presumably will for some time to come. If anything is clear, it’s that the near-term attention for the Trump administration has been fine-tuned to focus on China.
Chinese imports will be where consumers will experience the greatest sticker shock in the coming weeks and months, barring any ratcheting back of current tariffs being applied, which now top 100%.
How much of those tariffs will businesses decide to push through to consumers? How much might businesses choose to absorb as they contemplate how to weather the current storm? Will they be able to push some of the impact further up their supply chain to share the burden? That remains to be seen and will undoubtedly vary. Nonetheless, consumers will see higher prices in the near term.
Inflation is at a bit of a crossroads, having fallen in recent months, moving closer to the Fed’s 2% target. While a positive development, it pales in comparison to the near-term outlook, one dominated by expectations for a resurgence in prices, as import tariffs become reality.
The question is how consumers will react to higher sticker prices. Sentiment has soured in recent months, and there are already signs of not only a more cautious mood, but more constrained spending.
Prices may rise, but that doesn’t mean that consumers will pay any price for any product. Some may grumble but continue to spend, but many are much more likely to trade down to cheaper alternatives or delay discretionary purchases.
That reality raises the probability of a more notable slowdown in the pace of the economy, with the risk of recession also rising.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.
