Tariffs should have just a one-time effect on the prices US consumers pay for imported goods, initially boosting inflation. Eventually, this effect will drop out of the calculation of the annual figures. With the softening labour market likely to slow down gains in US wages further, we should see inflation easing off here as well, in particular at the ‘super-core’ level which concerns core services excluding the cost of shelter (i.e., housing).
While core goods inflation has been affected by the tariffs, we note that the latest (September) consumer price index (CPI) shows a benign picture of inflationary pressures in the US: disinflation can be seen in the shelter and super-core components of CPI (see Exhibit 1).
These two components account for three-quarters of the core consumer price index, which the Federal Reserve monitors closely when assessing the need for interest rate changes.
The other key indicator the Fed tracks for policy decisions is the shape of the job market. It appears that a softening labour market leading to weaker growth could now be a bigger risk for the US economy than inflation. From that perspective, further rate cuts by the Fed are still on the cards.
