This week’s US inflation rate announcement came in lower than expected , but will Trump’s tariffs fire things up still further for the markets in the weeks and months ahead?
Lindsay James, investment strategist at Quilter has shared her latest thinking with us, on this most recent economic news coming out of the US saying: “Inflation has moderated in the US, coming in at 2.8% and slightly below expectations. This is good news and the market may be buoyed by this in the hope of interest rate cuts coming, but the fact is the rate of inflation still sits comfortably above the 2% target. From here it is somewhat of a step into the unknown for inflation as the focus is firmly on tariffs, and the fluctuating picture of fresh tariffs followed by row backs later in the day.
“Ultimately, tariffs are an inflationary economic tool and will raise prices for consumers. Whether this is a one-time price change or something more sustained remains to be seen, but Donald Trump was elected in part due to his rhetoric to bring down inflation and make things cheaper. Tariffs are the opposite policy response in order to make this happen and instead risks tipping the US economy into recession. We are already seeing weak data points emerging as a result of the policies of the Trump administration – although other elements do continue to hold up.
“Should the data turn weaker and economic growth slow down in response to tariffs, then the Federal Reserve is likely to have little choice but to cut rates. However, it could find itself in somewhat of a predicament in that GDP growth is slowing at the same time as inflation picks up again after the effects of the new tariff regime has bedded in. This will make it harder to act and is something that concerns markets just now.”
Tiffany Wilding, Economist, at PIMCO, has also shared her analysis of these data saying: “Core inflation, a measure that excludes the volatile food and energy sectors, was softer than expected in February, reducing the year-over-year (y/y) to 3.1% vs 3.3% previously. Prices in the volatile travel services categories, and specifically airfares, were notably weak. Elsewhere, as expected retail goods inflation firmed, suggesting retailers are moving quickly to try to pass-on additional costs (both realized and expected) associated with the Trump Administration’s trade actions. We expect further goods price hikes to come from higher costs associated with (1) Chinese import tariff hikes, (2) USMA non-compliant goods tariffs (which are likely to raise costs for select auto producers operating in Mexico, among other things), and (3) steel and aluminum tariffs.
In terms of what this actually means, Wilding went on to say that “Yesterday’s CPI data suggest that additional tariff costs may result in more of a relative price shift, as opposed to a material boost to overall inflation. Higher costs that eat into consumer real disposal incomes are coming at a time when elevated policy uncertainty is clearly starting to weigh on sentiment and the economy more generally. Traditionally, these conditions should be more consistent with a relative price adjustment, as higher prices for one set of goods results in lower demand and softer prices in other categories – in February’s case the more flexible travel categories were the offset. The weakness in airfares evident in the February CPI report is consistent with the softer demand and lower earnings guidance reported by airline CEOs in recent earnings reports. Various retailers also downgraded guidance, suggesting more limited ability to pass on the additional costs in those categories as well. Within retail goods, clothing and household furnishings (appliances) were particularly firm, while other areas including electronics were weaker.
And commenting on what might happen next, Wilding said: “The latest batch of economic data should keep the U.S. Federal Reserve on track to cut its interest rate later this year. It’s not obvious that the new SEP projections should change that much vs December, since on the one hand, confidence and spending data are showing clear first quarter weakness, while on the other hand, short-run inflation expectations have ticked higher ahead of tariffs. At the end of the day, recent Trump Administration policy volatility leave us thinking the risk is that real GDP growth and labor markets weaken more than expected prompting somewhat sooner cuts. However, Fed Funds futures are more aligned with that view now than they were several weeks ago.“
Also commenting on the US inflation data, Daniele Antonucci, Chief Investment Officer of Quintet Private bank, (the parent of Brown Shipley) said:
“The downside surprise in US inflation will have given investors and policymakers alike some respite after a slew of challenging geopolitical news over the past few weeks. True, inflation is still above target. But the general trend so far remains one of moderation, perhaps an uneven one, but moderation nonetheless.
“In the near term, we think the Fed is likely to keep interest rates unchanged, given the high degree of uncertainty and the potentially inflationary effects of US trade and fiscal policies. But, even though we doubt that the economic dataflow is as weak as some of the high-frequency indicators suggest, we do see slower economic activity, partly because of elevated uncertainty hitting consumer, business and investor confidence.
“This is why, on balance, we believe that the Fed is still more likely to cut than not this year, and maybe sooner than envisaged prior to the inflation data, though less than expected by the market if one looks at the cuts priced in for the whole of 2025.
“These developments, along with the ongoing trade and geopolitical uncertainty hitting markets, has key investment implications.
“US tariffs, market fundamentals and geopolitics have caused a change in leadership in 2025: European equities are now outperforming their US counterparts due to improving corporate earnings relative to expectations, more attractive valuations and newly announced government spending, including for defence and infrastructure.
“And, while US tariffs are a downside risk, lower uncertainty and energy costs should the Russia-Ukraine war end is an upside risk. Therefore, we have recently decided to increase our exposure to European equities to a tactical overweight. To fund this trade, we’ve sold some US equities, as valuations are demanding, and policy uncertainty is higher. We still think innovation in the US is continuing apace, and AI-related themes remain compelling from a medium-term perspective. And we maintain our overweight on a US equal-weighted equity index, giving greater emphasis to attractively valued sectors that might benefit from US policies, such as fiscal stimulus and trade protection, from industrials to financials.“
Jochen Stanzl, Chief Market Analyst at CMC Markets said: “The inflation data are a bright spot in the Federal Reserve’s battle against rising prices. They reinforce the expectation of three rate cuts later in 2025. Particularly noteworthy is the decline in core inflation, mainly driven by a particularly steep drop in the prices of airline tickets. Whether this is already an effect of the DOGE savings programmes remains to be seen. We are now observing a positive reaction in stock futures. Sentiment on Wall Street is so negative that these positive inflation figures could spark a broader recovery in stock prices. However, any shift in sentiment is likely to depend on how the US government’s trade policy unfolds, as many investors link tariffs with higher inflation, which could soon undo the hard-won declines achieved by the Federal Reserve.”
Patrick O’Donnell, Senior Investment Strategist, Omnis Investments said: CPI MoM came in below expectations of 0.3% and was down from a rate of 0.5% in January. Demand for discretionary services did reduce somewhat last month, probably due to policy uncertainty, and likely fell more this month. However, sentiment remains rock-bottom now due to the concerns over US growth and this set of data won’t materially change that. With the tariff narrative remaining unfavourable, for the equity market to build on the tentative signs of stabilisation we saw yesterday, we will need to see some evidence that consumption is set to remain positive into Q2, which ultimately, we think we will get.
