Inflation and inflation expectations diverge

Markets have provided a real-time barometer of the new administration’s policy changes, flashing red one moment before ricocheting to green the next, sometimes several times a day. 

To say that there is abundant uncertainty would be an understatement. Regarding tariffs, President Trump seems to be negotiating against himself, as he has raised tariffs only to reduce them. It has been challenging to track all the changes, and the fact that he just paused most tariffs for 90 days only prolongs the uncertainty. 

Economic data released last week was similarly back and forth. So-called hard data on wholesale and consumer price inflation and weekly jobless claims showed no problems, as headline inflation actually fell in March and weekly jobless claims continued in their same historically low range. “Soft” data like surveys showed a very different picture, however. Small business optimism fell for the third straight month. Respondents noted heightened uncertainty on the administration’s policies, and they also reduced their hiring and expansion plans. The University of Michigan consumer sentiment survey, taken in the week before April 9, fell for the fourth straight month. For context, this measure ended 2024 at a reading of 74.0, and in March, it fell to 50.8, which is the second-lowest reading in the 47-year history of the survey, sandwiched between June and July of 2022 during the pandemic. More troubling for the Federal Reserve were the respondents’ inflation expectations. They now anticipate it rising over the next year from 5.0% to 6.7%, the highest since 1981, and longer-term inflation rising from 4.1% to 4.4%, the highest since January 1991. The Fed next meets on May 7, but that’s plenty of time for more ups and downs.