US: Tariffs not enough to change Fed’s stance on inflation – Wells Fargo

Inflation could end up rising more meaningfully if trade barriers continue to arise, warned analysts at Wells Fargo. They noted that tariffs already imposed would increase CPI inflation by a scant 0.1 percentage point.  

Key Quotes:  

“Trade tensions have been escalating since the spring when President Trump announced tariffs onsteel and aluminum imports. Tit-for-tat responses to the initial tariffs levied by the administration  earlier this year are beginning to add up. Supply chain managers have been left scrambling to find  new sources of materials or face higher costs.”

“Certain industries, such as manufacturing, are feeling the effect of tariffs more acutely given the highly specialized and global reach of supply chains. When setting monetary policy, however, the FOMC’s goal of price stability is benchmarked against consumer price inflation, since higher input costs do not always result in higher final prices.”

“Just as the FOMC was reluctant to alter its projections on the economy based on potential changes to fiscal policy surrounding last year’s tax bill, the Fed is unlikely to alter monetary policy on potential changes to tariffs.”

“Given the small and temporary effect of the tariffs raised thus far, we do not expect to see the Fed meaningfully alter its current stance on inflation.”

“Inflation could end up rising more meaningfully if trade barriers continue to rise. Looking through the potential temporary impact to tariffs is also likely to be made difficult since they are coming at a time in which underlying inflationary pressures are already picking up.”