Trade truce or not, tariff pain will hit US in | Australian Markets

While an anticipated easing in trade tensions between the US and China has buoyed market sentiment, the total inflationary influence of the prevailing tariff regime is but to be felt in the US economic system, and will probably solely emerge in the late second quarter (Q2) of this 12 months, a main strategist warns.

The US’s April CPI report, launched yesterday, threw up a shock annual headline inflation determine of 2.3% – the bottom year-over-year gain since February 2021.

Core inflation, which strips out food and vitality costs, was additionally comparatively muted, with the annual charge unchanged at 2.8%.

According to Seema Shah, chief international strategist at Principal Asset Management, the softer-than-expected inflation report means that the prevailing tariff regime has but to feed by to inflation.

“Not only is the April CPI report unlikely to have fully captured the tariff impact post-Liberation Day, but inflation numbers will now be further whipsawed by the US-China temporary trade truce announcement,” she says.

She notes that, regardless of the short-term reprieve between the 2 largest trading companions (with an settlement by the US to cut 115-percentage factors in reciprocal tariffs with China for 90 days, in addition to the promise from Trump of a “trade reset”), tariffs immediately are nonetheless markedly larger than firstly of the 12 months, with vital levies in place for many US trading companions.

This consists of a remaining 30% levy for items imported from China (alongside a 54% tax on small packages from the nation).

As a outcome, Shah says, the “inflationary impulse” is but to hit the US economic system, and will probably solely emerge on the latter finish of Q2 this 12 months.

She acknowledges that the inflationary influence “may be partially and quickly eroded” ought to container site visitors between the nations promptly resume as a outcome of the short-term trade thaw.

However, a “clear read on the inflation trend won’t be visible for several months yet”, she warns.

Resultingly, the US’s coverage charge setter, the Federal Reserve, could also be pressured to extend its charge pause for some time.

The Fed maintained its coverage charge at 4.25%-4.50% in its May assembly, its third consecutive charge maintain (since December 2024).