An early sign that tariff-driven inflation may not be the same as the postpandemic price surges

Everyone wants to know how much tariffs will boost inflation, and for how long.

That’s the top-of-mind question for the Federal Reserve in deciding whether or not to deliver additional interest rate cuts, and will be determined by how much executives elect to change their pricing strategies and how consumers react.

What everyone at the Federal Reserve wants to avoid — especially since postpandemic inflation was much less transitory than monetary policymakers had hoped — is a prolonged period of elevated price pressures.

So it’s very useful to try to pin down any early indications on how much pricing and spending behavior is similar to or different from what prevailed back in the days of lockdowns, economic reopening, and supply chain snarls.

To summarize: back then, US consumers were flush with cash (thank you, stimmys!) and had largely nothing else to spend it on besides stuff. 

A supply shock contributed to higher prices, but demand played a role as well. This is a simple stylized fact that helps explain the persistence of postpandemic inflation. Consumers bought more stuff at higher prices because they had the money to do so. They then binged on experiences at high prices because (you guessed it!) they had the money to do so.

Some tweets from Ernie Tedeschi, director of economics at The Budget Lab and former chief economist at the White House Council of Economic Advisors during the Biden administration, and Neil Dutta, Renaissance Macro head of US economics, help shed some light on what is similar and different this time.

Durable goods prices have been going up. A lot…

…but nominal spending on durable goods is not (and given that prices are up, that holds for real spending, too).

Frankly, I’m not a massive fan of looking at year-to-date changes in either of these given that we can probably make a more educated guess on when and how tariffs were entering consumers’ consciousness. But to get more granular with the analysis, what the data seem to show month-to-month are:

A jump in spending on durable goods in March when tariff talk was fast and furious but before the reciprocal tariffs were announced on Liberation Day, with nominal spending edging slightly higher the month thereafter when durable goods prices posted their biggest one-month jump since August 2022. In narrative terms, that’s a rush to beat higher prices, with a mild bit of follow-through in April given the potential for additional price increases to come thereafter as companies cleared inventory and would face more pressure on input costs going forward.

Then in May, nominal spending slumped while prices were virtually flat.

Let’s compare that to the pandemic period: an enduring stretch of price up and quantity purchased up until a broad economic reopening, after which durable goods consumption flatlined as prices continued to surge (largely an autos story) and spending and price pressures migrated toward the services sector over time.

I mean, it’s just one month. But if the May example of “after price shock, quantity purchased down and amount spent down” in durable goods becomes a recurring theme and is not matched by a commensurate pickup in services spending, well, that’s different! This would imply much less reason to be worried about tariffs fostering a prolonged inflationary outburst rather than a one-off shock to prices, because consumers would be showing they do not have the same desire or capacity to respond to higher prices with higher demand.

And with good reason: households have gone from being flush from government transfers and seeing the aggregate national paycheck grow at a double-digit clip from 2021 through the middle of 2022 to seeing that rate of growth cut to 5%.

The price shock is much more mild than what prevailed in the aftermath of the pandemic, reopening, and wars thus far, and is highly likely to stay that way (knock on wood). But the US consumer’s butt is not sitting on nearly as comfy a cushion.

While I’d personally love to see a positive income boost that helps Americans more easily weather higher prices, I just have one question: where the heck is that coming from?!?