The imposition of wide-ranging tariffs raises the effective U.S. average tariff from about 2.4% to roughly 15% (some estimates near 19%), including a 50% tariff on imports from India. Headline CPI currently sits near 2.7% but shows limited momentum. The ISM services 'prices paid' component leads the CPI by roughly three months and recently climbed to about 69.9, a level historically associated with CPI readings above 4%. Consumers also report expectations of higher prices. Meanwhile, inflation swaps and parts of the market have not fully priced in the increased import-cost transmission, implying a material underestimation of near-term inflation risk.
One of the central mysteries inside President Trump's tariff plan is, where is the inflation? Once all the new levies are in place-the latest is that all imports into the U.S. from India will be subject to a 50% tariff starting today-the effective average tariff rate will be somewhere near 15%. Estimates vary. Pantheon Macroeconomics puts it as high as 19%. Prior to Trump, it was 2.4%.
Deutsche Bank's Henry Allen published a research note yesterday arguing that it is following, and that the market is underestimating its effect. He points to the correlation between the prices paid variable in the ISM services indicator. The survey is a relatively narrow one, and it measures what service-economy companies are paying for goods. But the weird thing about it is that the indicator moves in close correlation to the Consumer Price Index, except that the CPI lags ISM services by three months.
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