President Trump's Inflation Dilemma Escalates with Hotter-Than-Expected CPI Report

President Trump's promise to rein in inflation faces new complexities after the release of a higher-than-anticipated consumer price index (CPI) for January. The report triggered market volatility, driving down stock prices and pushing up bond yields.

While some investors now anticipate a delayed interest rate cut rather than the decrease they initially expected, others speculate about the possibility of a rate increase. However, veteran economist Nouriel Roubini warns that even a delayed rate cut could lead to a "collision course" between Trump and the Federal Reserve.

Federal Reserve's Resistance to Rate Cuts

Roubini asserts that Fed Chair Jerome Powell's repeated indication of no imminent interest rate reduction could put him at odds with Trump's call for lower rates. Trump has advocated for reduced rates to complement his tariff agenda, despite Powell's concerns about inflationary pressures.

Tariff Policy Concerns

Economists express apprehensions about the impact of Trump's proposed policies, including tariffs, which may exacerbate inflationary pressures. Moody's Analytics chief economist Mark Zandi warns that consumers will ultimately bear the costs.

Roubini emphasizes that tariffs, protectionism, and economic conflicts with allies and China contribute to inflation and impede growth. Zandi echoes these concerns, noting that Trump's tariff proposals will likely elevate inflation, increase interest rates, and constrain economic growth, further complicating Federal Reserve policy decisions.

CPI Print Signals End of Disinflation

The January CPI report indicates a halt to the disinflationary trend, as prices rise across various sectors, including energy, food, used vehicles, and motor vehicle insurance. Zandi highlights the broad nature of these price increases as a cause for concern, particularly in the context of tariffs.

Moody's Analytics Projections

Moody's Analytics Global Macroeconomic Model forecasts a 0.5% rise in consumer price inflation within a year if tariffs on Canada and Mexico go into full effect in March, along with additional levies on China. Additionally, real GDP is projected to decline by 0.6% during the same period.

Equity Market Risks

David Kostin of Goldman Sachs warns that tariffs pose a significant downside risk to earnings growth, estimating a potential 1% to 2% reduction in 2025 S&P 500 earnings estimates with every 5% increase in US tariffs.

Roubini's Outlook and Policy Constraints

Roubini, who anticipates single-digit returns for the S&P 500 this year under "moderate" Trump policies, warns that "bad policies" may force the Fed to maintain its current stance. This could increase the risk of a market correction.

However, Roubini believes the probability of the Trump administration implementing "bad policy" is unlikely. He identifies four "guardrails" that could mitigate extreme policy measures: market discipline, Fed independence, strong economic advisors, and bond vigilantes, with the latter playing a key role in restraining Trump. Roubini emphasizes that investors will hold Trump accountable for policies that harm growth and fuel inflation, acting as the most potent constraint.