Economists say the impact of tariffs on consumer prices could reach this summer.
The Federal Reserve voted to keep interest rates unchanged at the FOMC meeting on Wednesday (June 18). Fed Chairman Jerome Powell said he expects inflation that will soon be “meaningful” and noted that some of the cost burden of the Trump administration’s tariffs “will fall on the end consumers.”
Four months after President Trump began imposing tariffs on major U.S. trading partners, consumer prices remain relatively stable. Inflation in May was 2.4%, slightly lower than economists’ forecasts of 2.5%. A key factor in reducing inflation is the continued decline in housing costs, which constitutes the largest part of the Consumer Price Index (CPI).
Since February 1, President Trump has issued a wide range of tariffs through the execution order, most notably the “Liberation Day” tariffs on about 90 countries on April 2. Although Trump suspended most tariffs, existing taxes remain at record highs. Therefore, one question must be asked: Why hasn’t inflation surged yet?
Economists generally agree that the full inflationary impact of tariffs may take several months to achieve. Many businesses are eager to build inventory before the tariffs are introduced, allowing them to temporarily protect themselves and consumers from higher costs. Santander chief economist Stephen Stanley expects CPI to rise to 3% by the end of this year, with a significant increase starting in June and July.
Another strategic retailer uses the use of margin warehouses – a special free trade area where companies can store imported goods without paying tariffs until they are withdrawn. These warehouses have become a key buffer in the midst of turbulent trade policies. The cost of bond warehouse space has soared, now four times higher than regular storage after only doubled in early 2024, according to WarehouseQuote. These facilities can hold stock in these facilities for up to five years.
“The largest inventory accumulation occurred in March, just before the 'Liberation Day' tariffs,” KPMG economist Diane Swonk told Observer. “After Trump was elected, companies began stocking stocks due to concerns about the coming tariffs.”
This stock mat provides our businesses with a buffer to consumers’ price shocks, at least so far. Ongoing trade negotiations between the White House and its major trading partners are expected to end by July 8, when a 90-day pause expires.
Geopolitical tensions in the Middle East exacerbate inflation
But tariffs are not the only inflationary threat. Concerns about geopolitical tensions in the Middle East have also increased consumer price pressures. The escalating conflict between Israel and Iran (especially concerns about the potential closure of the Strait of Hormuz), a key transport lane with 20% of the world's oil supply flowing – increasing inflation anxiety. Crude oil prices soared 13% to $77.18 a barrel after the June 13 attack on Tehran, although it has since been reduced to around $74.
KPMG's swonk expects temporary oil prices to rise to $85 a barrel and then pullback to $74, which could boost global inflation to 4.1% in 2025. That's more than her previous 3.7% forecast already accounts for expected tariff impacts. “Consumers will feel the impact soon,” she said.
The market has lowered expectations for lower interest rates this year due to new tariffs. It's frustrated President Trump, who publicly criticized Powell and is working on cutting it right away. However, investors expect this year's reduction is less than before Trump's re-elected rate.
Meanwhile, there is increasing speculation that Treasury Secretary Scott Bessent is an influential macro investor and leading architect of government economic strategy, who can succeed at the end of next year’s term.
