The New York Fed’s survey looked at how businesses reacted to higher tariffs. Almost one-third of manufacturers and 45% of service companies raised their prices to cover the extra costs from tariffs. The survey was done before tariffs on Chinese goods dropped from 145% to 30%, and it showed that prices were rising quickly. More than half of manufacturers and service providers increased their prices within a month, with many doing so in just a day or a week. A worrying trend is that companies raised prices on goods and services not directly affected by tariffs. They did this to cover costs like wages and insurance, taking advantage of the situation to boost their prices. Recent US PMI data indicate that inflation pressures are rising. This suggests we could see higher consumer price index (CPI) numbers soon. The Fed is challenged to balance the effects of tariffs with broader inflation trends. While tariff-related price hikes might be temporary, easing measures could make price increases stick around longer, complicating the return to the 2% inflation target, which has been surpassed for five years. The article emphasizes that price adjustments happened not only for goods affected by tariffs but across the board. Companies quickly raised retail prices in response to new import costs, with many adjusting prices in just a week. More importantly, many businesses changed prices for products unrelated to tariffs. They cited reasons like rising insurance, labor, and freight costs. The speed and consistency of these adjustments suggest a level of opportunism, taking advantage of the pricing environment. With purchasing managers’ indexes showing ongoing price pressures, consumer inflation may rise again, even if headline numbers soften temporarily. Bringing inflation back down to below 2% will require more than just waiting. For over five years, inflation has not shown much potential for improvement without specific and targeted policy actions. If price increases from trade policies mix with general supply-side pressures, they risk becoming permanent. Once embedded in consumer expectations and business contracts, reversing these prices becomes challenging. This is why any changes in policies, whether easing or tightening, must be carefully timed and based on new data, especially with inflation pressures coming from multiple directions. Market participants betting on declining inflation will soon need to adjust their expectations. If last year’s price drops were due to interest rate hikes or temporary supply fixes, that won’t necessarily soften future readings. In fact, some of the disinflation trends we’ve observed might disappear, leaving policymakers and markets a different picture as new CPI data arrives. There was hope, following Powell’s strategy, that tariff adjustments would lower input costs and reverse price spikes from earlier in the year. But this view may be too optimistic if businesses have already set expectations about what prices “should” be. Traders looking ahead must consider that the second half of the year may not show the disinflation current asset prices anticipate. If inflation remains persistent, any monetary adjustments may not align with current market rates. We’ve observed how tariff-related price changes can affect prices beyond just consumer goods. Service inflation, especially in areas like healthcare, education, and insurance, often lags but can become stickier once set. Previous surveys noted that once companies altered their pricing strategies due to input costs, few reverted even when conditions improved. Those betting on lower inflation will need to watch if recent price-setting actions indicate a temporary shift or a more lasting trend. Current behaviors suggest the latter. Timing is key, but it’s also important to see if temporary factors have turned into established habits. Signs like faster price adjustments or multiple rounds of changes should not be ignored. While we have not yet seen the full impact of a rollback in Chinese tariffs on consumer prices, the quick price hikes before those adjustments highlight how reactive firms have been this cycle. This indicates that any delays in lowering prices post-reduction may not just be inertia; it might mean that high pricing has become the new normal. This realization is crucial for anyone evaluating short-term volatility and pricing stability.

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