US: Tariffs impact on inflation cushioned by small import content in PCE – NBF

National Bank of Canada’s analyst, Krishen Rangasamy, considers the potential impact of tariffs in US inflation. According to him, import prices are currently being restrained by the appreciation of the US dollar but he warns that even if they weren’t, overall impact of tariffs on inflation, would be cushioned by the relatively small import content in overall personal consumption expenditures.

Key Quotes:

“With Q2 U.S. GDP growth estimated to have topped 4% annualized, one would have expected stronger inflation pressures than what was shown in last week’s CPI report ─ recall that core CPI was running at just 1.7% on a 3-month annualized basis in June.”

“The combination of “demand pull” (i.e. stronger demand) and “cost push” (i.e. higher costs due to labour market tightness and/or import tariffs) is supposed to lift inflation. While there is evidence of stronger demand, the “cost push” story doesn’t seem to be materializing based on still-soft wage growth (which continues to puzzle economists) and tame import prices.”

“Import prices are being restrained by an appreciating U.S. dollar which is offsetting impacts of higher tariffs.”

“It’s unclear if importers, determined to keep their share of a competitive marketplace, would opt to pass on the increased costs entirely to consumers. Even in the unlikely scenario of a full passthrough, the overall impact on inflation would be cushioned by the relatively small import content in overall U.S. personal consumption expenditures.”