Source : THE AGE NEWS
The latest US inflation data shows a glimpse of what might have been: an inflation rate falling steadily towards the Federal Reserve Board’s target, lower interest rates and a growing economy.
Alas, the data doesn’t capture the impact of Donald Trump’s global trade war, which probably won’t start to surface until next month or be fully reflected until well into the second half of the year.
Brace yourself for Donald’s Trump’s tariff storm.Credit: AP
The consumer price index for April confirms that, when Joe Biden handed over stewardship of the world’s largest economy to Trump in January, the US was in good shape. The economy was growing, until the initial impact of the trade war – a scramble by importers to get in ahead of the tariffs – produced a contraction in the March quarter. Inflation was gradually receding.
The headline inflation rate rose 2.3 per cent in April, the lowest rise since February 2021, when the supply chain shock from the pandemic was about to gather momentum and send prices soaring.
Core inflation – excluding volatile food and energy prices – rose at a 2.1 per cent annual rate over the three months to end-April, marginally above the Fed’s 2 per cent target.
That is, of course, old news. Trump announced his main tariff plans – a 10 per cent universal baseline tariff of 10 per cent, “reciprocal” tariffs of up to 100 per cent on the 90-odd countries with whom the US has a trade deficit and 145 per cent on China – on his so-called “Liberation Day” on April 2, with the tariffs coming into effect a week or so later.
With companies and consumers rushing to beat expected price rises – “front-loading” their purchases – the impact of the tariffs was always going to be delayed.
Then Trump paused the reciprocal tariffs for 90 days until July, and then, after last weekend’s truce with China, which saw that tariff reduced to 30 per cent and China’s 125 per cent retaliatory tariff cut to 10 per cent, paused that confrontation until August.
While the effects of the baseline tariffs will start to show up relatively quickly, given that the rest of the tariff regime will remain a work-in-progress until after the 90-day pauses end, the full impact of Trump’s trade war won’t be reflected in the data until the latter months of this year, at the earliest.
There’s no understanding of what the tariffs might look like after those pauses, but at the current rates, the Yale Budget Lab said this week they would increase prices by 1.7 per cent – the equivalent of a cost of $US2800 (about $4320) per US household – and reduce US economic growth by 0.7 percentage points.
With the reciprocal tariffs yet to come, that could be regarded as a conservative assessment of the trade wars’ damage.
The inflation data and the lingering euphoria generated by the weekend’s de-escalation of US-China trade hostilities finally saw Wall Street’s S&P 500 index recover the losses it had incurred since “Liberation Day”, to be up 0.1 per cent for the year. It is still, however, 4.2 per cent below the February peak reached before Trump unveiled his “reciprocal” tariff ideas.
While sharemarket investors have reacted enthusiastically to events at the weekend and the inflation data – as if the trade war has ended – the reality is that even at the current rates, the effective average tariff on US imports is still 17.8 per cent, according to the Yale Budget Lab.
That is the highest rate since 1934 and almost 7.5 times the 2.4 per cent average US tariff before Trump decided to wage his trade war on the rest of the world.
While the impacts might have been delayed by the pulling forward of imports ahead of their introduction, the higher tariffs will inevitably flow through to higher inflation and lower growth.
At the start of this year, working on the assumption that US inflation would continue to cool, financial markets were pricing in as many as four Fed rate cuts this year, starting in March. Now they are pricing in two, with the first in September, although some of the major Wall Street banks don’t expect any movement from the Fed until December at the earliest.
Trump’s wild decision-making and the consequent volatility within financial markets complicate efforts to assess their implications for the economy. It’s obvious that they are not positive, but not so obvious how deleterious they might be, or when their impacts will show up.
That has the Fed keeping rates on hold. The US central bank will have to wait until it sees their final shape, after the pauses in the reciprocal tariffs and the tariffs on China have ended, before it can start to come to grips with their near- and long-term economic effects.
The Fed would be very conscious that, if it were to cut US rates prematurely, it might add to the inflationary pressures generated by the tariffs and might transform what could be a “one-off”, or transitory, effect into a structural increase in inflation.
Trump seems oblivious to the risk of a stagflationary recession – an economic slump occurring while inflation and interest rates remain high – even though, if one were to develop, it would be the direct result of his policies, after Biden handed over an economy that was in good shape.
Predictably, after the release of the inflation data, he took to social media to again criticise the Fed and its chairman, Jerome Powell (with his usual idiosyncratic use of capitals).
“No inflation, and Prices of Gasoline, Energy, Groceries, and practically everything else, are DOWN!!!,” he wrote.
“THE FED must lower the RATE, like Europe and China have done. What is wrong with Too Late Powell?”
“Too Late Powell”: After the inflation data, Trump slammed Fed chair Jerome Powell yet again on social media.Credit: Bloomberg
He said the Fed’s policies were “not fair to America, which is ready to blossom” and “just let it happen, it will be a beautiful thing”.
If not for Trump’s destructive and self-destructive trade policies, America would be “blossoming”, or at least would have an economy growing quite solidly with falling interest rates. The rest of the world would be in better shape, too.
Trump made no reference to his tariffs in his post, but his administration’s backdown from a full-scale confrontation with China is an implicit, albeit belated, admission that tariffs will hurt the economy.
Even with the massive reduction in the rate on imports from China, from 145 per cent to 30 per cent, when added to the pre-existing tariffs on China (a legacy of Trump’s first trade war in 2018-19), the effective average rate would be above 40 per cent.
That will have price effects, even though – unlike when the rate was 145 per cent – there will still be some imports from China, albeit more expensive ones.
The trade moratorium negotiated at the weekend may defer and reduce, to some degree, the damage Trump’s trade war does to the US economy, depending on what happens when the 90-day pauses end. That’s why sharemarket investors have been celebrating, perhaps prematurely, this week.
It will be interesting to see how the markets, the Fed and Trump respond when that damage finally surfaces.
Trump will probably blame Powell and the Fed, the Fed will have to choose between fighting inflation or protecting growth and employment, and investors will just cut their losses and run.
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