Are tariffs showing up in consumer prices?

Key Concepts

• Core Goods Prices: Prices of goods excluding food and energy, considered a key indicator of underlying inflation.
• Tariff Pass-Through: The extent to which increased costs due to tariffs are reflected in consumer prices.
• Rate Cuts: Reductions in interest rates by the Federal Reserve, typically used to stimulate economic activity.
• Wage Inflation: Increases in wages, which can contribute to overall price increases.
• Inflation Outlook (2026): Forecasts for the rate of inflation in the coming year, influencing monetary policy decisions.

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Inflationary Pressures and the Outlook for Rate Cuts – Fitch Ratings Analysis

This discussion with Olusola, US Head of Economic Research at Fitch Ratings, centers on the recent inflation data in the US, the potential for tariff pass-through, and the implications for Federal Reserve rate cuts in 2026. The conversation highlights a nuanced perspective, suggesting that while overall inflation may see some upward movement, specific data points offer reasons for cautious optimism.

Stalled Inflation & Core Goods Prices

Recent data indicates a potential stall in the progress of throttling back inflation at the end of the year. However, Olusola emphasizes the significance of flat core goods prices as a key positive takeaway from the report. This suggests that underlying inflationary pressures, excluding volatile food and energy costs, are stabilizing. The month-on-month reading being “basically zero” is presented as evidence against significant tariff pass-through at this time.

Tariff Pass-Through Mitigation

The question of whether tariffs are being passed through to consumers is addressed directly. Olusola states that current data doesn’t support substantial pass-through, indicating that companies have employed “various strategies to mitigate” these increased costs. However, a critical question is raised regarding the sustainability of these mitigation strategies. The analysis focuses on whether companies can continue absorbing tariff costs through 2026, or if they will inevitably need to increase prices to reflect the higher costs. This is framed as a key uncertainty in the inflation outlook.

Electricity Price Increases & Wage Inflation

A notable increase in electricity prices – “up almost 7% from December before to last December” – is discussed. While pinpointing the exact cause is acknowledged as “difficult,” Olusola suggests a strong link to wage inflation, particularly within the hourly labor market. Specifically, the discussion points to grocery stores and grocery chains, which rely heavily on hourly labor, as areas experiencing wage increases. These wage increases are then potentially “passed through in the form of higher food prices,” contributing to overall inflation.

Federal Reserve Rate Cut Projections for 2026

Fitch Ratings currently projects two rate cuts in 2026. The initial cut is anticipated to occur in March, with a potential for another cut before the end of the first half of the year. This projection is contingent on the continuation of the positive trend observed in the recent data. Olusola clarifies that while inflation generally may lead to caution from the Federal Reserve, consistent data mirroring the current trend would likely prompt a March rate cut.

Inflation Forecast & Potential Upside Risk

Despite the possibility of rate cuts, Fitch Ratings anticipates inflation moving higher, projecting a rate of “right around 3%” for 2026. This forecast contrasts with some expectations of lower inflation. The expectation of higher inflation is attributed to the anticipated “some pass through” of tariff costs in 2026.

Logical Connections & Synthesis

The conversation establishes a clear connection between mitigating factors (flat core goods prices, company strategies to absorb tariffs) and potential inflationary pressures (wage inflation, eventual tariff pass-through). The projection of rate cuts is directly linked to the continuation of favorable data trends, while the 3% inflation forecast acknowledges the potential for upward pressure from tariffs.

The key takeaway is that the inflation outlook is complex and requires careful monitoring. While current data offers some positive signals, the sustainability of mitigation strategies and the potential for tariff pass-through represent significant risks that could push inflation higher and influence the Federal Reserve’s monetary policy decisions.