Tariffs have begun to affect inflation in the United States, but Wall Street has not yet realized it

Wall Street may have underestimated the impact of Trump's tariff policy on U.S. inflation.

On Sunday, May 25, Jim Bianco, president of Bianco Research and senior macro analyst, posted on social media platform X that a new wave of inflation driven by tariffs may be starting, and the Federal Reserve may find it difficult to lower interest rates for a long time, while Wall Street has yet to realize the risks this brings.

According to him, the latest data shows that the U.S. has collected approximately $24 billion in tariffs over the past seven weeks since early April, which means the overall cost of imported goods has increased by about 3.6% compared to April 2. Bianco stated that about 15% of U.S. consumption consists of imported goods, and based on the 3.6% increase, last month's U.S. CPI may have risen by about 0.54%, which aligns with the 0.64% calculated by the real-time tool Truflation, indicating that U.S. consumers are paying for this wave of tariffs, and prices are starting to rise.

Bianco pointed out that this has also made the Federal Reserve hesitant to easily lower interest rates, as the Fed is more concerned about inflation risks than about economic recession and unemployment risks, while Wall Street is still focused on slowing growth and rising unemployment, attributing rising yields to any reason, but ignoring that tariff-driven inflation is the core variable, mistakenly believing that interest rate cuts will come soon.

From the market response, Bianco mentioned that not only has the 30-year U.S. Treasury yield surpassed 5%, but the probabilities of interest rate cuts at the Fed meetings in June, July, and September have all fallen below 50% for the first time, with the market believing that there will be no rate cuts before the end of October, and even then it may not happen.

The following is the full content of Jim Bianco's post:

1. Bianco stated that we cannot yet determine whether consumers are paying higher prices due to tariffs; it may take a few months for the data to truly reflect this. However, some preliminary data has already shown that prices are indeed rising. This means that tariffs may push up inflation, causing the Federal Reserve to maintain interest rates for a long time. But Wall Street has not really realized this point yet.

2. U.S. Customs collects tariffs every day, most of which are paid to the Treasury around the 22nd of each month. On Thursday (May 22), the U.S. Treasury account suddenly received $16 billion. So far this year, tariff revenue has increased by about $29 billion compared to the same period last year. On April 2, tariff revenue increased by about $5 billion compared to the same period last year. In just seven weeks, tariff revenue has increased by another $24 billion.

1. The total value of goods imported by the U.S. each month is approximately between $325 billion and $340 billion. The latest data shows that in recent months (as of March), import volumes have surged, as many importers brought in goods early to avoid the tariff increases after April 2

1. Assuming that the United States imported a total of $650 billion worth of goods in April and May (official data has not yet been released). According to the previous chart (point 2), the U.S. has collected about $24 billion in tariffs over the past seven weeks, which means that the overall cost of imported goods has increased by approximately 3.6% compared to April 2nd.

2. About 15% of the goods purchased by American consumers are imported goods (remember, most consumers buy services, such as medical care and plumbing, which are almost all provided by locals... we wouldn't hire a plumber or doctor from China). If the prices of these goods are 3.6% higher, then...

3. Imported goods increased by 3.6% × 15% of consumption is spent on imported goods = Consumer Price Index (CPI) increased by 0.54%. We cannot determine whether this will be the case in the coming months, but one piece of data shows that prices increased by approximately this amount (0.54%) last month.

4. Looking at the red box, @truflation (a tool that tracks prices in real-time) shows that prices increased by 0.64% over the past month, which is almost in line with our calculated 0.54%. So this math checks out, indicating that most of the tariff costs are indeed being borne by consumers.

Truflation tracks the real-time prices of thousands of goods on the internet to estimate inflation (CPI). In its calculations, it places more emphasis on the prices of goods rather than services. Therefore, the overall inflation figure it produces is usually slightly lower than the official one, because in reality, service-related inflation (like rent and healthcare) typically rises more sharply than goods. The rate of change in inflation is more important than the price level.

1. Perhaps the market is preparing for an impending surge in inflation? The yield on 30-year U.S. Treasury bonds has already surpassed 5%, and for the first time this year, the market's probability of interest rate cuts at the Federal Reserve meetings on June 18, July 30, and September 17 has fallen below 50%. The Federal Reserve is unlikely to cut rates before Halloween... and even then, it may not happen.

1. Why do we have to wait until October 29 (the Halloween FOMC meeting) for the market to slightly believe that a rate cut is possible, with probabilities exceeding 50%? Because prices are the most important factor, and people are concerned that tariffs will push up prices (inflation)

2. Therefore, the current concerns about economic recession and soaring unemployment rates are actually less important than the possibility of rising prices. The Federal Reserve has chosen to remain inactive, while interest rates (especially long-term rates) are rising under this threat.

3. However, Wall Street has not realized this point. They always ignore the threat of rising prices and instead focus on the slowdown in economic growth and the potential rise in unemployment, naturally concluding that the Federal Reserve will definitely cut interest rates.

1. Wall Street always attributes rising yields to any reason, except for "stubborn" inflation. Now, the market's focus is on the fiscal deficit. Although the deficit pushes up yields (due to increased borrowing), a new round of inflation brought about by tariffs may be starting, and this is the more important factor.