Inflation Rate Forecast

Economic Forecasts

China Tariff Impact on Inflation Small for Now

Kiplinger's latest forecast on inflation

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The effect of today’s tariff hike will add only 0.1 percentage point to the inflation rate, if the tariffs remain in place for long. That would push up the inflation rate to 2.3% by the end of 2019. The Trump administration is also threatening to extend the 25% tariffs to an additional $325 billion of imports from China. Because most of this latter group would be consumer goods, that would have a larger effect, raising the inflation rate by an additional 0.4 percentage points. However, it would take some time for price increases to work their way through the system after the tariffs take effect.

Current inflation is mostly stable, at 2% over the past 12 months and 2.1% for the core rate, which is everything except food and energy. Energy prices have picked up this year, driving 2019’s overall inflation rate up slightly. But inflationary pressures in general are expected to remain moderate and stable.

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By the end of the year, shelter costs will have risen 3.5%, up from 3.2% in 2018. Food prices will have bumped up 1.8% — their fastest pace in four years — but could slide again if trade tensions with China are not resolved. The prices of all other commodities will be unchanged, on average, and medical care services’ costs will jump 2.6%, about the same as last year. Physicians’ services and prescription drug price inflation have been lower than expected. Despite this good news, the cost of health insurance is climbing at an 11% rate. Other services will be 1.6% more expensive in 2019, down from 2018’s 2.4% increase.

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The Federal Reserve won’t worry about the tariff effect on inflation, seeing any price effects as a one-time change. However, it will closely track whether higher wages are causing higher prices. It’s more likely to raise interest rates further if businesses pass on to customers their wage-hike costs, especially in the service sector. This is not likely to become evident until next year, however, if at all, because typically there tends to be a long lag between higher wages and higher inflation.

SEE ALSO: Print-Ready Consumer Price Index Chart

Source: Department of Labor, Inflation Data