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Unstoppable tariffs take on immovable U.S. inflation

Illustration: Sarah Grillo/Axios

A logjam of inflationary pressures is starting to hit the U.S. all at once, and will challenge the persistent low inflation that has been a hallmark of the economy for more than a decade.

What's happening: The biggest single inflationary catalyst is the trade war between the U.S. and China. Major companies, including Walmart and Macy's have already warned that tariffs will force them to raise prices.

Where it stands: UBS analyst Jay Sole said in a weekend note to clients that 25% tariffs on Chinese imports could accelerate pressure on companies' profit margins and put $40 billion of sales and 12,000 stores at risk.

  • And that's just one inflationary input.

What to watch: Oil prices hit a 3-week high Monday and look poised to rise further given the possibility of OPEC production cuts and U.S. sanctions on Venezuela and Iran.

  • Gas prices have managed to hold steady throughout much of the U.S. this year, but they now are facing a doubled-edged sword: the transition to more expensive summer gasoline blends and lower U.S. gasoline stocks, which are currently at a 7 million barrel deficit from 2018.

U.S. wages have picked up, particularly among low-wage workers as more municipalities and companies like Amazon and Target push through minimum-wage increases.

Perhaps most importantly, U.S. interest rates, which have remained low thanks to the Fed and market expectations for rates cuts, are facing "exploding US deficits and debt and foreign investors’ waning appetite for US debt," says Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.

  • Yields on the benchmark 10-year Treasury note have fallen to the lowest levels of the year but a spate of weak auctions recently — producing the lowest bid-to-cover ratios since the financial crisis — have analysts like Shalett looking for a reversal.

Yes, but: The country has faced many of these headwinds before. The big question now is whether these catalysts will lead to higher prices for consumers or if businesses will eat the increased costs, lowering profit margins and reducing revenue.

The bottom line: Data shows that near- and even medium-term inflation expectations remain low for the public and for Wall Street. The stock market continues to rise, backed by high profit margins and revenues. Something has to give.

Go deeper: Lack of U.S. inflation forces another look at long-held economic beliefs