New Council of Economic Advisors report finds tariffs not causing inflation

A new report from the Council of Economic Advisers (CEA) challenges the assertion that the Trump administration's tariffs are causing inflation, finding that imported goods prices have fallen faster than overall goods prices since February. Specifically, the imported component of the Personal Consumption Expenditure (PCE) index declined 0.1% from December through May, while overall PCE goods prices rose 0.4% during the same period. This analysis suggests tariffs have not diminished the disinflationary impulse from imported goods, as no clear trend break has been observed this year, though the CEA acknowledges its findings do not account for a counterfactual scenario without tariffs.

Analysis

A new report from the Council of Economic Advisers (CEA) presents data suggesting that recently implemented tariffs have not been a driver of inflation through May. The core of the argument rests on the divergence between imported and domestic price trends within key inflation gauges. Specifically, the imported goods component of the Personal Consumption Expenditure (PCE) price index declined 0.1% from December to May, while the overall PCE goods index rose 0.4% in the same period. This pattern is corroborated by Consumer Price Index (CPI) data, which showed a 0.8% drop in imported goods prices while overall goods prices remained flat. The CEA contends this demonstrates that the disinflationary pressure from imported goods has persisted despite the new levies. However, the report's conclusion carries significant caveats; it explicitly states that the analysis does not establish a counterfactual scenario without tariffs, and it notes that a divergence between goods and imported goods prices had already begun in late 2023, with no clear trend break this year. This implies that pre-existing trends, rather than the absence of a tariff effect, could be influencing the data.

Key Decisions for Investors

• Investors should consider that the direct, first-order inflationary impact of tariffs on consumer goods prices appears muted as of May, potentially providing a modest tailwind for assets sensitive to inflation expectations.
• It is crucial to monitor upcoming inflation data for any change in the relationship between import and overall goods prices, as the CEA's analysis is backward-looking and does not preclude future pass-through effects or shifts in trend.
• Given the report originates from the Executive Office, its findings should be viewed as a defense of current trade policy; therefore, investors must remain attentive to the primary risk of further tariff escalations or retaliatory measures, which could alter the current pricing dynamics.