Key Points:

  • Atlanta Fed economists say tariffs imposed by the Trump administration have prompted companies to raise their expectations for price increases over the next year, creating a "high risk" of broad inflation spillover.
  • The economists noted that the economic impact of import tariffs could resemble the supply shock triggered by the pandemic—which fueled high and widespread inflation in the early 2020s. Firms directly bearing the tariffs have raised their expected price increases over the next year by 0.7 percentage points; meanwhile, those not directly bearing the tariffs but affected by cost spillover effects plan an additional increase of 0.3 percentage points.Related Reports。
  • "The possibility that what initially appeared to be one-off tariff-related price increases could evolve into a broad-based inflation shock—much like what we experienced a few years ago—is currently high," the Atlanta Fed economists said.

In-Depth Analysis:

This price pressure warning comes as Federal Reserve Chair Jerome Powell signaled last Friday (August 22) that policymakers may still consider lowering borrowing costs at the September 16-17 meeting, even though inflation remains above the central bank's 2% long-term target.

"The downside risks to employment are rising," Powell said ina speech, "and if these risks materialize, they could manifest quickly in the form of a surge in layoffs and rising unemployment."

Paving the way for rate cuts, Powell said: "Given that (monetary) policy is in a restrictive range, the baseline outlook and the shift in the balance of risks may require us to adjust our policy stance."

In exploring the inflation outlook, Atlanta Fed economists analyzed data from the regional bank's "Survey of Business Uncertainty." This monthly survey targets C-suite executives and business owners leading private nonfarm firms, covering all major industrial sectors, and collects more than 900 responses each month.

"We find that business executives, on average, have raised their expectations for price increases over the next year since late last year," the economists said. "Firms whose supply chains depend on imported goods have seen their one-year-ahead expectations significantly revised upward."

"Since late last year, price expectations have risen noticeably," the economists added.

"Although the imposition of tariffs appears to be the catalyst for the rebound in price growth expectations, their spillover to 'insulated firms' raises the risk of a broad-based rise in inflation." They define "insulated firms" as those that source goods domestically and do not pay tariffs.

While warning of labor market weakness, Powell did not overlook the inflation threat.

"In the near term, inflation risks are tilted to the upside," he said.

Powell believes the impact of import tariffs could be relatively short-lived—manifesting as a one-time jump in prices—but he also cautioned that it takes time for tariff costs to transmit through supply chains and distribution networks.

"However, it is also possible that the upward price pressures from tariffs could trigger more persistent inflation dynamics, a risk that needs to be assessed and managed," Powell said.

Other Fed officials have also recently flagged inflation risks.

While the job market warrants attention, "but you also have to be vigilant on the inflation side," Richmond Fed President Tom Barkin said in a Bloomberg podcast released Monday (August 25),as saying。

Inflation is "sticky" and could accelerate to 3%, he said, noting that "companies are passing on costs, and those without cost pressures are using it as cover to pass on costs too."

The Fed's preferred inflation gauge—the Personal Consumption Expenditures (PCE) price index excluding volatile food and energy prices—may have risen 2.9% year-over-year in July, up from 2.8% in June, moving further away from the central bank's 2% long-term target, Powell revealed.

Consumer inflation expectations are also deteriorating. The Conference Board'sConsumer Confidence Report, released Tuesday (August 26), showed that consumers' average inflation expectations for the next 12 months jumped from 5.7% in July to 6.2% this month.

Open-ended responses in the survey "showed an increase in mentions of tariffs, and these mentions continue to be associated with concerns about rising prices," Stephanie Guichard, senior economist for global indicators at The Conference Board, said in a statement.

Additionally, "in August, mentions of high prices and inflation (including food and groceries) rose again," Guichard added.