Trump's Promise to Curb Inflation Complicates as CPI Surprises
President Trump's pledge to tackle inflation faces new challenges after the Consumer Price Index (CPI) exceeded expectations in January. The report rattled markets, leading to a sell-off in stocks and a surge in bond yields. Investors now anticipate a less aggressive rate-cutting stance by the Federal Reserve, while some speculate about a potential rate hike.
Economist Nouriel Roubini warns that even delaying a rate cut could trigger a "collision course" between President Trump and the Fed. "Trump wants lower rates now," said Roubini. "We're seeing those tensions escalate."
Ahead of the inflation release, Trump urged the Fed to loosen monetary policy, claiming that lower interest rates complement his tariff agenda. However, Federal Reserve Chair Jerome Powell has repeatedly resisted the pressure, indicating that the Fed is not in a hurry to cut rates.
Powell cautioned against speculating on the economic impact of tariffs, but Wall Street remains skeptical of Trump's policy initiatives. Roubini emphasizes that the administration's proposed tariffs and other measures risk aggravating inflationary pressures.
"Tariffs, protectionism, and economic conflicts with allies and China are inherently inflationary and growth-reducing," Roubini explains. Mark Zandi, chief economist at Moody's Analytics, shares concerns that Trump's tariffs will exacerbate inflation.
Data from January's CPI report indicates that disinflation is fading, with prices rising across various sectors, including energy, food, used vehicles, and insurance. Zandi notes the "broad-based nature" of price increases and expresses worry about the implications of tariffs.
Moody's Analytics projects that implementing tariffs on Canada and Mexico, combined with the latest levies on China, could lift consumer inflation by 0.5% within a year, while reducing real GDP by 0.6%.
Goldman Sachs' David Kostin warns that tariffs pose a significant downside risk to corporate earnings, estimating that a 5% increase in US tariffs could reduce 2025 S&P 500 earnings by 1-2%.
Despite the potential risks, Roubini sees a "moderate" possibility of Trump implementing harmful policies. He identifies "guardrails" such as market discipline, Fed independence, competent economic advisors, and "bond vigilantes" as constraints on Trump's actions.
"Investors will punish Trump if his policies harm growth and push up inflation," Roubini asserts. "That may ultimately be his greatest check."