Context:

U.S. inflation saw a mild increase in April, but economists and policymakers are bracing for a potential surge due to President Trump's trade war. The Consumer Price Index rose by 2.3% from the previous year, marking the slowest pace since 2021, while core inflation, excluding food and energy, increased by 2.8%. The temporary reduction of tariffs between the U.S. and China has eased immediate economic concerns, but the potential for inflation remains high, particularly as tariffs continue to impact costs. There is uncertainty about whether tariffs will lead to a temporary price increase or a more persistent inflation problem. The Federal Reserve is holding off on interest rate cuts until the economic impact of these policies becomes clearer, with expectations that inflation could rise to 3.5% by the end of the year.

Dive Deeper:

• In April, the U.S. Consumer Price Index rose 2.3% year-over-year, the slowest increase since early 2021, while core inflation, which excludes volatile food and energy prices, rose 2.8%, consistent with the previous month's year-over-year rise.

• The recent inflation report brought some relief to the Trump administration and the Federal Reserve as they aim for a 2% inflation target, but concerns persist about future price acceleration due to the impact of import taxes.

• Tariffs, especially those between the U.S. and China, have been temporarily reduced, easing immediate fears of economic shock; the U.S. reduced tariffs on Chinese goods to 30%, while China cut tariffs on American goods to 10%.

• Despite the tariff reduction, economists warn that continued tariffs could stoke inflation and hinder economic growth, with an anticipated inflation rise to 3.5% by the end of the year, as measured by the core personal consumption expenditures price index.

• Many companies have built up inventories to delay passing tariff costs to consumers, but as these stockpiles diminish, price increases are expected to become more apparent by the summer.

• The Federal Reserve is cautious about cutting interest rates, prioritizing monitoring inflation expectations, and plans to wait for clearer signs of economic impact before making any rate changes.

• The economic outlook has improved slightly, with Wall Street banks predicting that the Fed will maintain its current stance on interest rates until at least December, as inflation concerns take precedence.