Trump says inflation is 'defeated' and the Fed has cut rates, yet prices remain too high for many

Despite President Trump's declaration that inflation is 'defeated,' the article highlights that inflation remains elevated at 2.9% in August, above the Fed's 2% target, and has risen recently. The Federal Reserve's recent rate cuts are viewed as a significant gamble, predicated on the assumption that tariff-induced price increases will be temporary. However, economists and corporate executives warn that ongoing tariffs are compelling companies to raise prices on various goods, from coffee to manufactured items, potentially eroding the Fed's inflation-fighting credibility and leading to sustained price pressures, even as some Fed officials express optimism about other disinflationary factors.

Analysis

Despite President Trump's assertion that inflation is "defeated," consumer prices rose 2.9% in August, exceeding the Federal Reserve's 2% target and marking an increase from 2.6% a year prior. The Fed recently cut its key interest rate, with Chair Jerome Powell acknowledging elevated inflation but downplaying upside risks, based on an assumption that tariff-induced price increases would be temporary. This move comes despite most Fed officials expressing concern about high inflation in their September meeting minutes.

The ongoing and escalating tariff regime, including recent 100% duties on pharmaceuticals and 50% on kitchen cabinets, is demonstrably impacting consumer prices. Companies like Campbell Soups (CPB) are implementing "surgical pricing initiatives" due to increased input costs from tariffs, while National Tree Company plans a 10% price hike this holiday season, citing tariff costs and potential supply reductions. This direct pass-through of tariff costs to consumers challenges the Fed's assumption of transitory inflation.

Economists, including Karen Dynan and Jason Furman, view the Fed's rate cuts as a "big gamble," warning that sustained inflation could erode the central bank's crucial credibility. If consumers and businesses lose confidence in the Fed's ability to control prices, it could trigger an inflationary spiral, making future price stabilization efforts more costly. While some Fed officials, like Stephen Miran, express optimism about disinflationary factors such as slowing rental costs, the prevailing sentiment among experts is pessimistic regarding the current inflation trajectory.

Key Decisions for Investors

• Investors should closely monitor upcoming inflation data, especially the September report, as sustained price increases above the Fed's target could challenge the central bank's current dovish stance and erode its credibility.
• Evaluate portfolio exposure to companies reliant on imported goods or those facing significant tariff burdens, as these firms are likely to continue passing increased costs to consumers, potentially impacting margins or sales volumes.
• Consider the implications of a prolonged period of elevated inflation, as the market may be underpricing the risk that the Federal Reserve's assumption of transitory tariff impacts proves incorrect, necessitating a reassessment of monetary policy.