Inflation Stays Low as Expected, but Superheated Pressure Will Blow off Steam Soon
The big-deal, China-deal stock rally didn’t last long with the Dow falling today (while the S&P and Nasdaq put out modest to decent gains). US Treasuries also climbed (intraday) back above the 4.5% level on the 10YR, which has, for a long time now, been the pressurized level at which stocks become troubled.
While Trump engages in an interesting Middle East tour that may bring significant changes over time, I’ll save that complex matter for the weekend Deeper Dive, unless other things come up in the meantime that become more important, and will simply take a look at our first real post-tariff glimpse of inflation today.
There was no surprise here because I’ve been saying all along there is little chance of these high tariffs pricing through for consumers until summertime because retailers will be reluctant to raise prices until existing inventories bought pre-tariffs run out. On top of that, we’ve seen a lot of buyers front-running the tariffs by loading up warehouses as much as each individual company could afford to do and/or could find space for.
Then, of course, there is the fact that tariffs have been turned off or turned down as often as they have been raised, and we entered another 90-day rest on the big tariff bash of all. However, even with the emergency reprieves, there remains plenty of pressure building to severely burn ourselves with the self-inflicted wounds of higher prices. The “pause” has opened up a second round of front-running higher tariffs with high-pressure purchases from China because Trump told everyone that tariffs with China will almost certainly end up higher than where they are during the rest. Even that sudden burst of purchases is still happening at very high tariff rates, which will be causing prices to rise even on the front-run items … just not as much as later on.
Michael Snyder, who is a very conservative Trump supporter, put together an article about how the China Deal is far from a good deal today and defined in his article how much the convoluted twists and turns of the on-and-off tariffs with China currently add up to:
First of all, we don’t actually have a “trade deal” with China. What we have is a 90 day “cooling off period” during which we could potentially negotiate a “trade deal” with China.
There is an enormous difference between those two things.
For 90 days, both sides will reduce tariffs dramatically.
Without a doubt, that is a good thing.
If we had continued to impose a 145 percent tariff rate on most Chinese products, there would have been empty shelves and shortages all over America….
The same as I had warned.
Major news outlets are reporting that most Chinese exports to the United States will be hit with a 30 percent tariff rate during the “cooling off period”, but that is not accurate.
On the War Room, Jason Miller explained what is actually happening. According to Miller, “we have 50 percent tariffs on China, they have 10 percent on us”.
He got to that figure by adding the 10 percent baseline tariff rate plus the 20 percent fentanyl tariff rate plus the 20 percent tariff rate from Trump’s first term.
And this is actually confirmed on the official White House website. It states that the only tariffs that are being removed by the United States are the “additional tariffs” that were imposed on April 8th and April 9th…
That means there might not be a lot of front-running because, with tariffs as high as 50%, they are still almost effectively a trade embargo. What will be bought up under this reprieve is essential components and supplies for manufacturers and businesses—things that cannot readily be bought outside of China—car parts, plane parts, other manufactured high-tech components, anything manufactured to another business’s specifications where retooling may take more time than American businesses have or where infrastructure and available resources for their manufacture are not readily available elsewhere. However, on the stuff that isn’t essential or can be had elsewhere, I suspect a 50% tariff rate is effectively a ban on trade with China, and Trump says that is only going to end up worse.
According to U.S. Treasury Secretary Scott Bessent, the current tariff rate on Chinese imports is a “floor”.
So, as Snyder says (and as I’ve been saying),
Treasury Secretary Scott Bessent said Monday that the trade agreement reached over the weekend represents another stage in the U.S. shaking its reliance on Chinese products….
So things are never going to go back to the way they once were.
The Trump administration is framing this “cooling off period” with China as a big win, and stock prices absolutely soared today….
But the tariff rate on Chinese imports is now far higher than it was just a couple of months ago.
That is not good news at all.
Prices on thousands upon thousands of products that we import from China will be going up.
In some cases, the price increases will be quite dramatic.
Those that are on the bottom levels of the economic spectrum will be hit the hardest.
If you shop at Walmart, Target, Home Depot or at any of our dollar stores, you will feel the pain.
Our standard of living has been going down for years, and it is about to go down even more.
According to CBS News, even after accounting for lower tariffs on Chinese goods “Americans today face an overall effective tariff rate of 17.8%”…
… meaning that is the overall hit the average person will take from all the tariff the US has imposed against all nations spread over all the products that the average person buys. But, of course, you won’t see that rise begin until existing inventories are exhausted. Since there is no talk about tariffs being lowered beneath where they stand are under all the 90-day reprieves, this is likely the best-case scenario for the years ahead.
Neither will you see that 18% pile through all at once when prices do start rising. Inventories of some things may last a year, while a few things may run out before summer, but shipping/logistics experts say to expect a noticeable decline in inventories by early summer.
That averaged rate remains the highest tariff impact since the Great Depression. I’m quoting Snyder because he has been a longterm Trump supporter, and even he says,
High tariff rates deepened the Great Depression in the 1930s, and the global economy is far more interconnected today than it was back then.
Even if a permanent trade deal with China can be secured, and even if that permanent trade deal does not raise tariffs from where they are at this moment, we are still going to experience a lot of economic chaos in the months ahead….
A 50 percent tariff rate on Chinese imports is still really going to sting.
The U.S. economy has been heading in the wrong direction for years, and this is certainly going to accelerate our problems.
There is much rejoicing for the moment, but it won’t be too long before the reality of what we are facing becomes undeniable.
And that moment may have already turned for stocks, which notably cooled down from their jet-streak yesterday as well as for bonds, which are losing value for bond traders as yields rise back to the line of demarcation where money starts pumping into bonds as a better yield than stocks with lower risk.
As for today’s reported CPI rates, I’m going to leave those to the two articles highlighted below to give you the specifics, which basically added up to the goods you want and need the most rising a bit, and those you don’t likely want or need as much (for the most part) dropped, giving a benign overall reading. The important thing for this editorial is just the explanation that nothing in any of my Deeper Dives expressed anything different than what we just saw. I would have been surprised to see the effects of tariffs pricing through this quickly, even though many tariffs were in effect throughout April, the month being priced.
As I already told my Deeper Dive readers, don’t expect to see much change until summer, and then expect inflation to rise slowly as highly stocked inventory begins to run out at varying times for different retailers, depending on how much they were able to overstock, and at varying times for different products within those retailers. It should take a little longer than that for the rise in prices to fully impact service people, depending on how long it takes before they have to start buying their supplies from retailers and wholesalers after their own inventory runs out, and given that their labor rates are not directly impacted by tariffs.
What I want to help you with here is shore you up against anyone beguiling you into believing that the insignificance in changes reported now in the weeks ahead for May and June mean much. You may start to see some of this show up by the end of June when you are shopping and, therefore, may see that inflation make it into July’s reports for June, but a fair part of June won’t likely be affected much; so, the real bursting of the boiler or popping off of the pressure-relief valve won’t happen until July in terms of when it hits your pocketbook or purse (and in August in terms of when July will be fully reported).
(Articles quoted above appear in boldface in the headlines that follow for paying subscribers:)