US inflation starts to rise

US inflation has started to rise, in consequence of the swingeing jump in tariffs.   It took a bit longer than I expected, probably because stocks (inventories) were higher than I thought.  But now that businesses have run down their pre-tariff stocks, they have no choice but to pass on their increased costs.  No doubt, as inflation gathers momentum, they will also be indulging in a bit of "greedflation", as they did in the post-covid inflation surge.   

But it's not just tariffs. The government's campaign against immigrants has meant that food prices are soaring, because immigrants pick and pack the USA's food.  (Coffee is rising because of global warming, and because of 50% tariffs on Brazilian coffee imports)

In my judgment, neither of these forces is anywhere near over.  Prices will continue to rise until equilibrium is reached, and that will be several months away.

The Fed could "look through" this surge in inflation, on the argument that it will not be a sustained jump in the inflation rate, but a one-off adjustment in price levels.  "Cost-push" rather than demand-led inflation.  That is what markets (shares, bonds and currencies) think will happen, and the next cut in rates later this month seems baked in.  

This rise in inflation will reduce real (inflation-adjusted) incomes, reducing spending, deepening the economic downturn.  This might seem to be an argument for further rate cuts, if it happens, but just as the inflation might be transitory, so would the economic downturn caused by that inflation.

Now, it is possible that wages may rise to compensate---which I do not think will happen---but if they do this will heighten Fed fears that higher inflation is becoming embedded in the system, which means they won't cut interest rates any further.

So, the Fed moves depend on data over the next few months.  If the economy continues to weaken, and wage inflation doesn't accelerate, the Fed will prolly cut the Fed Funds rate again.  If the economy stabilises, then the Fed will have the luxury of waiting for the inflation surge to slow, and it prolly won't cut rates again.  If wage inflation starts to pick up, all rate cuts are out of the question.  

I'm not at all sure what the inflation rate will peak at, but I wouldn't be surprised if it nears 5% by year-end or early in 2026.  This will be a very uncomfortable environment for the Fed to cut rates, as opposed to keeping them stable.  It will need to be quite sure that the rise in the inflation rate is transitory.  And that its moves are not seen as a response to Trump's pressure, which would destroy its credibility.