Seth Carpenter on Tariffs, Inflation, and Consumer Spending

Consumer Spending and Income Data

• 📉 The May personal income data showed a decrease, partly due to a decline in government social benefits, potentially related to the Social Security Fairness Act.
• 🛒 Spending on goods decreased by $49 billion, while spending on services increased by $20 billion, reflecting a potential unwinding of prior front-loading in goods purchases.
• 📊 The overall spending number was largely in line with expectations, with a negative 0.1% change, indicating a neutral stance on consumer health for now.

Inflationary Impact of Tariffs

• ⚠️ A significant takeaway is that current inflation data largely reflects pre-tariff conditions.
• ⏳ It is estimated that inflation reactions to tariffs can take three to five months to fully manifest.
• 📈 Therefore, any relief from tariff-induced inflation is considered premature, as the full impact has yet to be seen.

Inflation Expectations and Psychology

• 🗣️ While some Fed officials, like Waller, suggest looking through temporary price level increases, there's caution about inflation psychology.
• 🧠 The experience of recent years with higher-than-normal inflation may have anchored consumer and business expectations, making a return to pre-inflationary norms uncertain.
• ⚠️ This uncertainty contributes to the caution expressed by the Fed, particularly by Chair Jay Powell.

Pricing Power and Corporate Behavior

• ❓ A key question is the competitiveness of the US economy and the extent to which companies can engage in price gouging.
• 📈 Historical data from 2018-2019 shows instances where prices of goods without tariffs increased, suggesting businesses could pass on costs or capitalize on the environment.
• 🧩 It remains difficult to predict the exact magnitude and persistence of price increases, including whether service sector businesses will raise prices in response to higher consumer goods costs.