Inflation came in lower than expected in April and May as energy prices fell and the impact of tariffs on consumer prices remained muted.
Even as some goods showed early signs of tariff-induced inflation, businesses have for the most part managed to absorb the cost of the new trade taxes.
Many firms began stockpiling inventory as early as last November, shortly after the U.S. election.
Data on imported goods and wholesale inventories shows an unusually large buildup, particularly in the industrial sector, compared to historical trends.
The question now is: When will those inventories run out—forcing businesses to restock at higher, tariff-inflated prices?
Retail inventories, which consist of the direct-to-consumer stock held at stores, have remained uncharacteristically low since November. This was especially the case in March and April, likely a result of consumers front-loading their spending amid supply constraints.
If past seasonal patterns hold, the pressure point will arrive this summer and last through October, when retailers typically replenish inventories in preparation for back-to-school and holiday shopping.
Two potential inflationary paths could then unfold.
- Scenario one: Retailers dependent on direct imports will face immediate cost pressures. This has already begun to appear in the CPI data for May, with categories like bananas, roasted coffee and canned goods posting noticeable price increases.
- Scenario two: Retailers that source from domestic manufacturers or well-stocked wholesalers may delay price hikes as their supply chain absorbs some of the cost. But that buffer is limited—and won’t last indefinitely.
Regardless of which path dominates, September and October will most likely represent peak inflation risk. That’s when restocking for the holidays reaches its apex, and the effects of tariffs could be most acutely felt.
Following that logic, we are less confident that the Federal Reserve will be in a position to cut interest rates later this year. The ongoing uncertainty surrounding trade policy, combined with the likely timing of peak inflation, may delay any potential pivot by the Fed beyond this year.
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