Trump keeps saying he “beat” inflation, but coffee is 21% more expensive and groceries just had their biggest non-pandemic hike in a decade.
Inflation has risen in three of the past four months and is slightly higher than it was a year ago, when it helped derail then-Vice President Kamala Harris’ presidential campaign. Yet you wouldn’t know it from listening to President Donald Trump or even some of the inflation fighters at the Federal Reserve.
Trump told the United Nations General Assembly late last month: “Food prices are down, mortgage rates are down, and inflation has been defeated. »
And in a high-profile speech in August, just before the Fed cut its key interest rate for the first time this year, Federal Reserve Chairman Jerome Powell said: “Inflation, while still somewhat elevated, has declined significantly from its post-pandemic highs. Upside risks to inflation have diminished.”
Yet ignoring or even downplaying inflation while it is still above the Fed’s 2% target presents big risks for the White House and the Federal Reserve. For the Trump administration, it could find itself on the wrong side of a major problem: Surveys show that many Americans still view high prices as a major burden on their finances.
The Fed could be taking an even bigger gamble: It lowered its benchmark rate on the assumption that the Trump administration’s tariffs would only cause a temporary rise in inflation. If this turns out to be false – if inflation worsens or stays high longer than expected – the Fed’s credibility in fighting inflation could suffer.
This credibility plays a crucial role in the Fed’s ability to maintain price stability. If Americans are confident that the central bank can contain inflation, they will not take actions – such as demanding significantly higher wages when prices rise – that could trigger an inflationary spiral. Companies often raise prices to compensate for rising labor costs.
But Karen Dynan, a senior fellow at the Peterson Institute for International Economics, said this week that with memories still fresh of pandemic inflation and tariffs driving up the cost of imported goods, consumers and businesses could begin to lose confidence that inflation will remain low.
“If that turns out to be the case, in hindsight the Fed’s rate cuts — and I expect several more — will be seen as a mistake,” Dynan said.
So far, the Trump administration’s tariffs have not raised inflation as much as many economists predicted at the start of the year. And it remains well below its peak of 9.1% three years ago. Still, consumer prices rose 2.9% in August from a year earlier, up from 2.6% in the same period last year and above the Fed’s 2% target.
The government is expected to release the September inflation report on Wednesday, but the data will likely be delayed due to the government shutdown.
Tariffs have driven up the cost of many imported items, including furniture, appliances and toys. Overall, the cost of durable manufactured goods rose nearly 2% in August from a year earlier. This is a modest gain, but it comes after nearly three decades where the cost of these items has fallen significantly.
The cost of some consumer goods continues to rise faster than before the pandemic: Food prices rose 2.7% in August from last year, the largest non-pandemic increase since 2015. Coffee prices soared nearly 21% last year, partly because Trump imposed 50% import taxes on Brazil, a major coffee exporter, and also because that climate change-induced droughts have reduced coffee bean harvests.
Most Fed officials remain concerned that inflation is too high, according to minutes of its Sept. 16-17 meeting. However, they still chose to lower their key interest rate, because they were more worried about the risk of worsening unemployment than about a rise in inflation.
But some economists worry that the current implementation of tariffs and the fact that many companies continue to raise prices in response could lead to more than just a temporary surge in inflation.
“It’s a big gamble after what we’ve been through … to be able to hope that this is transitory,” said Jason Furman, an economist at Harvard University and former senior adviser to President Barack Obama. “In the past, (3% inflation) would have been considered very high. »
Just two weeks ago, Trump imposed new tariffs on a series of products, including 100% on pharmaceuticals, 50% on kitchen cabinets and bathroom vanities, and 25% on heavy-duty trucks. On Friday, he threatened “a massive increase in tariffs” on imports from China in response to that country’s restrictions on rare earth exports.
Some companies continue to raise prices to offset tariff costs. Tariffs on steel and aluminum imports have driven up the cost of cans used by Campbell Soups, leading the company’s CEO to declare in September that it would implement “surgical pricing initiatives.”
Chris Butler, CEO of National Tree Company, the nation’s largest seller of artificial Christmas trees, says his company will raise prices about 10 percent this holiday season on its trees, wreaths and garlands to offset tariff costs. About 45 percent of its trees are made in China, with the rest coming from Southeast Asia, Mexico and other countries. The cost of labor and real estate is too high to make them in the United States, he said.
Butler also expects a reduction in the supply of artificial trees and decorations this year, which could further drive up prices across the industry as most production in China was halted when tariffs on that country reached 145% earlier this year. Production resumed after Trump cut tariffs to 30%, but at a slower pace.
Butler has pushed its suppliers to absorb part of the cost of the tariffs, but they won’t pay the full amount.
“Ultimately, we cannot absorb the whole of this situation and our factories cannot absorb it in its entirety,” he said. “So we had to pass on part of the increases to consumers.”
Many Fed policymakers are aware of the risks. Jeffrey Schmid, president of the Federal Reserve Bank of Kansas City, which votes on interest rate decisions, said Monday that high inflation resulting from a loss of confidence in the central bank was harder to combat than other price spikes, such as those resulting from supply disruptions.
“The Fed must maintain its credibility on inflation,” Schmid said. “History has shown that while all inflation is universally hated, not all inflation is equally costly to combat. »
Still, some Fed officials say other trends are offsetting the impact of tariffs. Fed Governor Stephen Miran, whom Trump appointed just before the central bank’s September meeting, said Tuesday that a steady slowdown in rental costs should reduce core inflation in the coming months. And the sharp drop in immigration resulting from the administration’s crackdown will reduce demand, he said, cooling inflationary pressures.
“I am more optimistic than many others about the inflation outlook,” he said.
