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All the data shows inflation isn’t going away, making things tough on Fed

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A customer shops for food at a grocery store on March 12, 2024 in San Rafael, California.

Justin Sullivan | Getty Images News | Getty Images

The last batch of inflation news that Federal Reserve officials will see before their policy meeting next week is in, and none of it is very good.

In the aggregate, Commerce Department indexes that the Fed relies on for inflation signals showed prices continuing to climb at a rate still considerably ahead of the central bank’s 2% annual goal, according to separate reports this week.

Within that picture came several salient points: An abundance of money still sloshing through the financial system is giving consumers lasting buying power. In fact, shoppers are spending more than they’re taking in, a situation neither sustainable nor disinflationary. Finally, consumers are dipping into savings to fund those purchases, creating a precarious scenario, if not now then down the road.

Put it all together, and it adds up to a Fed likely to be cautious and not in the mood anytime soon to start cutting interest rates.

Things went the wrong way for the Fed in the first quarter, says Evercore ISI's Krishna Guha

“Just spending a lot of money is creating demand, it’s creating stimulus. With unemployment under 4%, it shouldn’t be that surprising that prices aren’t” going down, said Joseph LaVorgna, chief economist at SMBC Nikko Securities. “Spending numbers aren’t going down anytime soon. So you might have a sticky inflation scenario.”

Indeed, data the Bureau of Economic Analysis released Friday showed that spending outpaced income in March, as it has in three of the past four months, while the personal savings rate plunged to 3.2%, its lowest level since October 2022.

At the same time, the personal consumption expenditures price index, the Fed’s key measure in determining inflation pressures, moved up to 2.7% in March when including all items, and held at 2.8% for the vital core measure that takes out more volatile food and energy prices.

A day earlier, the department reported that annualized inflation in the first quarter ran at a 3.7% core rate in the first quarter in total, and 3.4% on the headline basis. That came as real gross domestic product growth slowed to a 1.6% pace, well below the consensus estimate.

Danger scenarios

The stubborn inflation data raised several ominous specters, namely that the Fed may have to keep rates elevated for longer than it or financial markets would like, threatening the hoped-for soft economic landing.

There’s an even more chilling threat that should inflation really persist, central bankers may have to not only consider holding rates where they are but also contemplate future hikes.

“For now, it means the Fed’s not going to be cutting, and if [inflation] doesn’t come down, the Fed’s either going to have to hike at some point or keep rates higher for longer,” said LaVorgna, who was chief economist for the National Economic Council under former President Donald Trump. “Does that ultimately give us the hard landing?”

The inflation problem in the U.S. today first emerged in 2022, and had multiple sources.

At the beginning of the flare-up, the issues came largely from supply chain disruptions that Fed officials thought would go away once shippers and manufacturers had the chance to catch up as pandemic restrictions eased.

But even with the Covid economic crisis well in the rear view mirror, Congress and the Biden administration continue to spend lavishly, with the budget deficit at 6.2% of GDP as of the end of 2023. That’s the highest outside of the Covid years since 2012 and a level generally associated with economic downturns, not expansions.

On top of that, a still-bustling labor market, in which job openings outnumbered available workers at one point by a 2 to 1 margin and are still at about 1.4 to 1, also helped keep wage pressures high.

Now, even with demand shifting back from goods to services, the normal state of the U.S. economy, inflation remains elevated and is confounding the Fed’s efforts to slow demand.

Weak growth and surging inflation is a bad combo for the Dow, says Jim Cramer

Fed officials had thought inflation would ease this year as housing costs subsided. While most economists still expect an influx of supply to pull down shelter-related prices, other areas have cropped up.

For instance, core PCE services inflation excluding housing — a relatively new wrinkle in the inflation equation nicknamed “supercore” — is running at a 5.6% annualized rate over the past three months, according to Mike Sanders, head of fixed income at Madison Investments.

Demand, which the Fed’s rate hikes were supposed to quell, has remained robust, helping drive inflation and signaling that the central bank may not have as much power as it thinks to bring down the pace of price increases.

“If inflation remains higher, the Fed will be faced with the difficult choice of pushing the economy into a recession, abandoning its soft landing scenario, or tolerating inflation higher than 2%,” Sanders said. “To us, accepting higher inflation is the more prudent option.”

Worries about a hard landing

Thus far, the economy has managed to avoid broader damage from the inflation problem, though there are some notable cracks.

Credit delinquencies have hit their highest level in a decade, and there’s a growing unease on Wall Street that there’s more volatility to come.

Inflation expectations also are on the rise, with the closely watched University of Michigan consumer sentiment survey showing one- and five-year inflation expectations respectively at annual rates of 3.2% and 3%, their highest since November 2023.

No less a source than JPMorgan Chase CEO Jamie Dimon this week vacillated from calling the U.S. economic boom “unbelievable” on Wednesday to a day letter telling the Wall Street Journal that he’s worried all the government spending is creating inflation that is more intractable than what is currently appreciated.

“That’s driving a lot of this growth, and that will have other consequences possibly down the road called inflation, which may not go away like people expect,” Dimon said. “So I look at the range of possible outcomes. You can have that soft landing. I’m a little more worried that it may not be so soft and inflation may not go quite the way people expect.”

Dimon estimated that markets are pricing in the odds of a soft landing at 70%.

“I think it’s half that,” he said.

Economics

Trump tariffs’ effect on consumer prices debated by economists

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The U.S. government is set to increase tariff rates on several categories of imported products. Some economists tracking these trade proposals say the higher tariff rates could lead to higher consumer prices.

One model constructed by the Federal Reserve Bank of Boston suggests that in an “extreme” scenario, heightened taxes on U.S. imports could result in a 1.4 percentage point to 2.2 percentage point increase to core inflation. This scenario assumes 60% tariff rates on Chinese imports and 10% tariff rates on imports from all other countries.

The researchers note that many other tariff proposals have surfaced since they published their findings in February 2025. 

Price increases could come across many categories, including new housing and automobiles, alongside consumer services such as nursing, public transportation and finance. 

“People might think, ‘Oh, tariffs can only affect the goods that I buy. It can’t affect the services,'” said Hillary Stein, an economist at the Boston Fed. “Those hospitals are buying inputs that might be, for example, … medical equipment that comes from abroad.” 

White House economists say tariffs will not meaningfully contribute to inflation. In a statement to CNBC, Stephen Miran, chair of the Council of Economic Advisers, said that “as the world’s largest source of consumer demand, the U.S. holds all the leverage, which means foreign suppliers will have to eat the economic burden or ‘incidence’ of the tariffs.” 

Assessing the impact of the administration’s full economic agenda has been a challenge for central bank leaders. The Federal Open Market Committee decided to leave its target for the federal funds rate unchanged at the meeting in March. 

The Fed targets its overnight borrowing rate at between 4.25% and 4.5%, with the effective federal funds rate at 4.33% on March 31, according to the New York Fed. The core personal consumption expenditures price index inflation rate rose to 2.8% in February, according to the Commerce Department. Forecasts of U.S. gross domestic product suggest that the economy will continue to grow at a 1.7% rate in 2025, albeit at a slower pace than what was forecast in January.  

Consumers in the U.S. and businesses around the world are bracing for impact. 
 
“There is a reason why companies went outside of the U.S.,” said Gregor Hirt, chief investment officer at Allianz Global Investors. “Most of the time it was because it was cheaper and more productive.” 

Watch the video above to learn how much inflation tariffs may cause.

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Economics

Trump’s tariff gambit will raise the stakes for an economy already looking fragile

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U.S. President Donald Trump speaks alongside entertainer Kid Rock before signing an executive order in the Oval Office of the White House on March 31, 2025 in Washington, DC. 

Andrew Harnik | Getty Images

President Donald Trump is set Wednesday to begin the biggest gamble of his nascent second term, wagering that broad-based tariffs on imports will jumpstart a new era for the U.S. economy.

The stakes couldn’t be higher.

As the president prepares his “liberation day” announcement, household sentiment is at multi-year lows. Consumers worry that the duties will spark another round of painful inflation, and investors are fretting that higher prices will mean lower profits and a tougher slog for the battered stock market.

What Trump is promising is a new economy not dependent on deficit spending, where Canada, Mexico, China and Europe no longer take advantage of the U.S. consumer’s desire for ever-cheaper products.

The big problem right now is no one outside the administration knows quite how those goals will be achieved, and what will be the price to pay.

“People always want everything to be done immediately and have to know exactly what’s going on,” said Joseph LaVorgna, who served as a senior economic advisor during Trump’s first term in office. “Negotiations themselves don’t work that way. Good things take time.”

For his part, LaVorgna, who is now chief economist at SMBC Nikko Securities, is optimistic Trump can pull it off, but understands why markets are rattled by the uncertainty of it all.

“This is a negotiation, and it needs to be judged in the fullness of time,” he said. “Eventually we’re going to get some details and some clarity, and to me, everything will fit together. But right now, we’re at that point where it’s just too soon to know exactly what the implementation is likely to look like.”

Here’s what we do know: The White House intends to implement “reciprocal” tariffs against its trading partners. In other words, the U.S. is going to match what other countries charge to import American goods into their countries. Most recently, a figure of 20% blanket tariffs has been bandied around, though LaVorgna said he expects the number to be around 10%, but something like 60% for China.

What is likely to emerge, though, will be far more nuanced as Trump seeks to reduce a record $131.4 billion U.S. trade deficit. Trump professes his ability to make deals, and the saber-rattling of draconian levies on other countries is all part of the strategy to get the best arrangement possible where more goods are manufactured domestically, boosting American jobs and providing a fairer landscape for trade.

The consequences, though, could be rough in the near term.

Potential inflation impact

On their surface, tariffs are a tax on imports and, theoretically, are inflationary. In practice, though, it doesn’t always work that way.

During his first term, Trump imposed heavy tariffs with nary a sign of longer-term inflation outside of isolated price increases. That’s how Federal Reserve economists generally view tariffs — a one-time “transitory” blip but rarely a generator of fundamental inflation.

This time, though, could be different as Trump attempts something on a scale not seen since the disastrous Smoot-Hawley tariffs in 1930 that kicked off a global trade war and would be the worst-case scenario of the president’s ambitions.

“This could be a major rewiring of the domestic economy and of the global economy, a la Thatcher, a la Reagan, where you get a more enabled private sector, streamlined government, a fair trading system,” Mohamed El-Erian, the Allianz chief economic advisor, said Tuesday on CNBC. “Alternatively, if we get tit-for-tat tariffs, we slip into stagflation, and that stagflation becomes well anchored, and that becomes problematic.”

Tariffs could be a major rewiring of the domestic and global economy, says Mohamed El-Erian

The U.S. economy already is showing signs of a stagflationary impulse, perhaps not along the lines of the 1970s and early ’80s but nevertheless one where growth is slowing and inflation is proving stickier than expected.

Goldman Sachs has lowered its projection for economic growth this year to barely positive. The firm is citing the “the sharp recent deterioration in household and business confidence” and second-order impacts of tariffs as administration officials are willing to trade lower growth in the near term for their longer-term trade goals.

Federal Reserve officials last month indicated an expectation of 1.7% gross domestic product growth this year; using the same metric, Goldman projects GDP to rise at just a 1% rate.

In addition, Goldman raised its recession risk to 35% this year, though it sees growth holding positive in the most-likely scenario.

Broader economic questions

However, Luke Tilley, chief economist at Wilmington Trust, thinks the recession risk is even higher at 40%, and not just because of tariff impacts.

“We were already on the pessimistic side of the spectrum,” he said. “A lot of that is coming from the fact that we didn’t think the consumer was strong enough heading into the year, and we see growth slowing because of the tariffs.”

Tilley also sees the labor market weakening as companies hold off on hiring as well as other decisions such as capital expenditure-type investments in their businesses.

That view on business hesitation was backed up Tuesday in an Institute for Supply Management survey in which respondents cited the uncertain climate as an obstacle to growth.

“Customers are pausing on new orders as a result of uncertainty regarding tariffs,” said a manager in the transportation equipment industry. “There is no clear direction from the administration on how they will be implemented, so it’s harder to project how they will affect business.”

While Tilley thinks the concern over tariffs causing long-term inflation is misplaced — Smoot-Hawley, for instance, actually ended up being deflationary — he does see them as a danger to an already-fragile consumer and economy as they could tend to weaken activity further.

“We think of the tariffs as just being such a weight on growth. It would drive up prices in the initial couple [inflation] readings, but it would create so much economic weakness that they would end up being net deflationary,” he said. “They’re a tax hike, they’re contractionary, they’re going to weigh on the economy.”

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Economics

Euro zone inflation, March 2025

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A man pushes his shopping cart filled with food shopping and walks in front of an aisle of canned vegetables with “Down price” labels in an Auchan supermarket in Guilherand Granges, France, March 8, 2025.

Nicolas Guyonnet | Afp | Getty Images

Annual Euro zone inflation dipped as expected to 2.2% in March, according to flash data from statistics agency Eurostat published Tuesday.

The Tuesday print sits just below the 2.3% final reading of February.

So called core-inflation, which excludes more volatile food, energy, alcohol and tobacco prices, edged lower to 2.4% in March from 2.6% in February. The closely watched services inflation print, which had long been sticky around the 4% mark, also fell to 3.4% in March from 3.7% in the preceding month.

Recent preliminary data had showed that March inflation came in lower than forecast in several major euro zone economies. Last month’s inflation hit 2.3% in Germany and fell to 2.2% in Spain, while staying unchanged at 0.9% in France.

The figures, which are harmonized across the euro area for comparability, boosted expectations for a further 25-basis-point interest rate cut from the European Central Bank during its upcoming meeting on April 17. Markets were pricing in an around 76% chance of such a reduction ahead of the release of the euro zone inflation data on Tuesday, according to LSEG data.

The European Union is set to be slapped with tariffs due in effect later this week from the U.S. administration of Donald Trump — including a 25% levy on imported cars.

While the exact impact of the tariffs and retaliatory measures remains uncertain, many economists have warned for months that their effect could be inflationary.

This is a breaking news story, please check back for updates.

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