So, it’s been almost eight months since “Liberation Day”. how time flies. Nevertheless, we still do not see any significant uptick in the overall inflation scenario in the US. Yes, there have been higher prices but it has not had much of an impact on the overall narrative.
And as we look towards 2026, how will all this change and what will be the inflation story for the year ahead?
The thing to remember about “Liberation Day” is that the higher tariffs did not have an immediate effect. It took time for the prices to filter through and to date, we still don’t fully see how those tariffs have driven up consumer prices.
Core commodity inflation is something that is slowly becoming visible. But otherwise, the overall inflation story is one that has been lower than anticipated especially because of all the fears around Trump’s tariffs prior to April this year.
Come next year, be careful inflation mirageNo, the Consumer Price Index (CPI) is not cooling in a meaningful way, Inflation is not going away, It’s just the fact that high prices are here to stay and we are reaching a new equilibrium level in terms of where prices should be, That especially in the second half of next year,
As noted above, Trump’s tariffs did not have an immediate impact. It is taking more than six months for things to filter out and that is an important thing for market players to note.
All of this is going to affect the base effect calculation of how we get CPI next year, especially in the second half of the year.
As a result, inflation figures and PCE may also see a significant decline during the second half of 2026. And if the Fed hasn’t become politically corrupt by then, it could give them an easy way to appease Trump into doing more rate cuts.
Long story short, be mindful of the impact of base effects when reading CPI data in the second half of next year. This will cause the effects of Trump’s tariffs to slowly filter into the economy over the past few months.
In other words, the year-over-year reading may show a cooling in inflation. However, this is only a matter of base effect. As such, monthly data will be a more important metric to examine when the time comes.
Think of it this way, the price of a watch increased from $20 to $25 this year due to tariffs. This is a 25% increase in “inflation”. At the same time next year, the price may still be $25 and the “inflation” metric will show 0% instead.
Why is all this important?
This certainly plays into the Fed outlook. How will the central bank react to all this?
If pushing for a rate cut in the first half of the year proves difficult, this is one path they can point to to ensure that their policy fits with Trump’s agenda. This is because they continue to strive towards that neutral rate which most people think is around 3%.
So, should the Fed look at base effects and stick to its guns on policy? Or will the new Fed chair take on Trump’s agenda and use it as a major selling point?
In any case the reality of the situation will remain the same Low inflation does not mean low pricesThis is the reality of the world we have been living in for the last decades,
