Tariffs, inflation, and loss of purchasing power – Commerzbank

Regular readers of our Daily Currency Briefing will already be familiar with one of my favorite charts, which illustrates market-based inflation expectations. Over the summer, I often wondered when we would see a decline in short-term expectations—specifically, those for one year ahead. Even if expectations remained unchanged, by definition, this would mean that market participants were simply shifting the inflation shock further into the future. This raises questions about how transitory this tariff-induced inflation shock really is, as Commerzbank’s FX analyst Michael Pfister notes.

**Inflation Outlook Eases as US Data Gaps Cloud the Picture**

The tariffs announced in July were, on average, 6 percentage points lower than the figures at the beginning of April. Many of the larger US trading partners were able to strike deals that anchored tariffs in the range of 15-20%. While this still brings inflationary pressure, it is unlikely to be as significant as originally expected. The majority of the tariffs came into force at the beginning of August. Assuming these tariffs are passed on to US consumers in the near future, the inflation shock is likely to drop out of year-on-year calculations by August or September next year, which would artificially lower the inflation rate.

However, the decline in expectations has accelerated since the beginning of October, with inflation expectations for the coming year falling by just under 0.5 percentage points. One could argue that this is due to the expected transitory nature of the shock, which will pass in the coming autumn. However, I suspect there is another reason: since the beginning of October, the US government shutdown has severely restricted the publication of new data. Although an inflation report was published for September, almost 40% of the data in it was imputed, making it significantly less reliable than usual. In the absence of reliable data, there is no reason to assume a more sustained inflation shock.

The White House has made it clear that the October inflation report, due to be published today, will likely not be released at all. Data collection did not take place during the shutdown, and it appears this will not be made up afterwards. Therefore, it may be some time before we receive reliable inflation figures that indicate how tariff increases are being passed on to US prices, thus enabling a reassessment of inflation expectations.

The Federal Reserve is not overcompensating for the inflation shock, meaning that US Dollar (USD) investors are experiencing a loss of purchasing power. However, the more likely it becomes that this inflation shock is truly only transitory, the less damaging this loss of purchasing power is likely to be for the USD. It is therefore important to monitor inflation expectations very closely in the coming months.
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