By Gregory Heym, BHS Chief Economist and and host of Crossing The Line
This week, we serve up the latest on tariffs, inflation, and consumer spending. Welcome to a very busy version of The Line.
U.S. and China Suspend Most Tariffs for 90 Days
Boy did we need this. After a lot of name calling and some huge new tariffs, the U.S. and China finally seem ready to strike a trade deal. Hopefully, they can finalize things before the 90-day pause expires, as we would all like this behind us.
The stock market was very happy, with the Dow up more than 1,100 points Monday, while the S&P 500 and Nasdaq both rose over 3% This news also made economists more optimistic—I know that sounds strange to say—as major brokerages such as Goldman Sachs and J.P Morgan have scaled back their recession odds.
Inflation Lower than Expected in April
Despite the start of President Trump’s new tariffs, the consumer price index rose just 0.2% in April and was 2.3% higher than a year ago. Core inflation—which excludes food and energy prices—also rose 0.2% last month and was 2.8% above last year’s level.
Why is the annual increase in core inflation higher than the overall number? Energy prices. Over the past 12 months energy prices have declined 3.7%, which helps bring the headline number down but has no impact on core inflation.
Why didn’t the start of the new tariffs push inflation up more? Some might say it’s too early to expect a large impact, but I say it’s because tariffs don’t necessarily cause a rise in inflation. Inflation is too much money chasing not enough goods. The money supply is shrinking—unlike the 40% increase during the pandemic—so there’s no reason to expect anything like the high rates of inflation that began in 2022. The prices of the items with tariffs may go up, but consumers still have the same amount of money to spend. That means if they are spending more money on certain products because of tariffs, they will have money available to buy others.
To end this section on a very positive note, the annual rate of core inflation of 2.8%—technically it’s 2.78% unrounded—is the lowest since March 2021. As inflation continues to move towards the Fed’s 2% annual goal, there will be calls for rate cuts. That said, you can expect the Fed to wait until the trade war is over to make any changes to interest rates.
Retail Sales Up Just 0.1% Last Month
After a tariff-fueled spending spree in March, consumer spending barely rose in April. Since retail sales surged 1.7% in March, a pullback was inevitable so don’t read too much into the weak April number.
Economists polled by Reuters were expecting no increase in sales, so you can take this as good news. The biggest increase in spending last month was in restaurants and bars, which saw a 1.2% jump in sales.
