Do tariffs still bite? ING weighs in

Investing.com - Concerns over hefty U.S. tariffs are back on the agenda, but U.S. inflation has stayed surprisingly benign and the economy is holding up. However, this is likely to change though, according to ING.

U.S. President Donald Trump ended the week, ahead of the U.S. holiday, threatening to unilaterally ramp up tariffs on a swathe of major trading partners, which he says could range from 10% to 70%.

Investors have, of course, seen this show before, said analysts at ING, in a note dated July 4. “It’s not the first time that the US administration has upped the ante days before a deadline – just think of the EU and the threat of a 50% tariff just a few weeks ago.”

It’s not that markets are completely immune to tariff noise altogether, but most investors seem to be expecting next week’s end to the 90-day delay to April’s reciprocal tariffs to come and go without any major drama.

“Whisper it, but things actually don’t look too bad from the perspective of the U.S. administration right now,” said ING. “The S&P500 – perceived to be a key bellwether within the White House – is at all-time highs (though best not to mention the dollar). The economy has largely held up, abstracting from import-related noise in the GDP figures. And inflation so far hasn’t taken off in any meaningful way. All the while, the US is collecting huge sums of tariff revenue.”

And so long as talks continue, trading partners like the EU have been reticent to retaliate in full.

Here’s the question, though: has the economic impact of tariffs genuinely been less bad than just about everyone feared earlier this year? Or is everything just happening with more of a lag?

When it comes to inflation at least, ING firmly thinks it’s the latter. 

The Fed’s preferred inflation gauge, the core PCE deflator, has been surprisingly benign for three months now. But when we get June’s data later this month, ING thinks that will change – and even more so when we get the numbers for July and August.

“We know from tariffs in Trump’s first term that it took a good three months or so for the effects to show up fully in prices. And this time around, American companies saw the tariffs coming and filled every ounce of warehouse space with stock. That inventory buffer has potentially offered companies, particularly those lacking pricing power, a window to ‘wait and see’ before lifting prices. But that window won’t last forever,” ING added.

The potential for a summer of hot inflation is the principal reason why we’re not expecting a September rate cut from the Fed, despite it being near-enough priced into financial markets. We’re looking for a November, or more likely December restart on Fed easing.

As for the economy generally, the jury’s out on whether we’re still waiting on the worst of the tariff hit. 

The latest jobs report certainly doesn’t point to the bottom falling out of the labor market, though if we’re talking about time lags, this is usually the last place economic damage shows up. 

“Sentiment remains fragile, remember. Tariffs have taken the wind out of the sails of the U.S. economy. That points to more muted growth rates from now on and that’s particularly problematic for America’s perilous public finances,” ING added.