Trump's Inflation Promise Faces Headwinds Amid Soaring CPI

President Trump's pledge to tame inflation hit a snag after the January Consumer Price Index (CPI) exceeded expectations. The report rattled markets, triggering a sell-off in stocks and a surge in bond yields as investors trimmed interest rate cut forecasts and mulled the possibility of a rate hike.

Economist Nouriel Roubini warns that even delaying a rate cut could spark a "collision course" between President Trump and the Federal Reserve. "Trump wants lower rates now," Roubini says. "Those tensions are already brewing and will escalate."

In the wake of the inflation release, Trump urged the Fed to lower rates, emphasizing that reduced rates align with his tariff agenda. However, Federal Reserve Chair Jerome Powell reiterated his reluctance to cut rates, emphasizing that the Fed will keep a restrictive policy stance for the time being.

Powell also cautioned against speculating on the economic impact of tariffs, but Wall Street remains wary of Trump's trade agenda. Roubini warns that tariffs and other proposed policies could exacerbate inflationary pressures, while Mark Zandi, chief economist at Moody's Analytics, forecasts that consumers will "bear the brunt."

"Tariffs and economic warfare with allies and China drive inflation and stifle growth," Roubini asserts. Zandi echoes concerns that tariffs will escalate inflation, raising interest rates and curbing economic expansion, further complicating the Fed's policy decisions.

Zandi attributes this heightened risk to the recent CPI print, which indicates "disinflation has ended" with price increases across sectors such as energy, food, and vehicles.

While the extent of Trump's tariff plans remains uncertain, Moody's Analytics estimates that implementing tariffs on Canada and Mexico while leaving China's additional 10% levy in place could lift consumer price inflation by 0.5% within a year. Real GDP could decline by 0.6% over the same period.

David Kostin of Goldman Sachs cautions that tariffs pose a significant downside risk to earnings growth, estimating a 25% increase in US tariffs would reduce 2025 S&P 500 earnings estimates by approximately 1%-2%.

Roubini projects the S&P 500 to return "single digits" this year with "moderate" Trump policies but warns that "poor policies" could force the Fed to maintain rates, potentially triggering a market correction.

However, Roubini views the likelihood of "poor policy" implementation as relatively low, citing "guardrails" such as market discipline, Fed independence, strong economic advisers, and "bond vigilantes" who will punish Trump for policies that harm growth or increase inflation.