The Federal Reserve voted to keep interest rates unchanged at Wednesday’s (June 18) FOMC meeting. Fed chair Jerome Powell said he expects “meaningful” inflation soon, noting that some of the cost burden from the Trump administration’s tariffs “will fall on the end consumer.”
Four months after President Trump began imposing tariffs on major U.S. trade partners, consumer prices have remained relatively stable. May inflation came at 2.4 percent, slightly below the 2.5 percent predicted by economists. One key factor holding inflation down is a continued decline in shelter costs, which make up the largest portion of the Consumer Price Index (CPI).
Since Feb. 1, President Trump has enacted a sweeping series of tariffs via executive orders, most notably the “Liberation Day” tariffs announced on April 2 targeting about 90 countries. While Trump has paused the majority of those tariffs for 90 days, existing levies are still at record high levels. So, the question has to be asked: why hasn’t inflation surged?
Economists widely agree that the full inflationary impact of tariffs may take months to materialize. Many businesses rushed to build up inventory ahead of the tariff rollout, allowing them to temporarily shield themselves—and consumers—from higher costs. Stephen Stanley, chief U.S. economist at Santander, expects CPI to rise to 3 percent by the end of this year, with noticeable increases starting in June and July.
Another strategy retailers have employed is the use of bonded warehouses—special free-trade zones where companies can store imported goods without paying tariffs until the items are withdrawn. These warehouses have become a critical buffer amid volatile trade policy. According to data from WarehouseQuote, the cost of bonded warehouse space has surged, now running four times higher than regular storage rates after having merely doubled in early 2024. Inventory can be held in these facilities for up to five years.
“The largest inventory buildup happened in March, right before the ‘Liberation Day’ tariffs,” KPMG economist Diane Swonk told Observer. “After Trump’s election, companies began stockpiling inventory out of fear of impending tariffs.”
That inventory cushion has helped U.S. businesses buffer consumers from price shocks—at least for now. Ongoing trade negotiations between the White House and key trade partners are expected to conclude before July 8, when the 90-day pause expires.
Geopolitical tension in the Middle East fuels inflation concerns
Economists say we’ll likely see the impact of tariffs on inflation later this summer, as companies run out of inventory and start selling goods that cost more to import.
But tariffs aren’t the only inflationary threat. Rising concerns over geopolitical tensions in the Middle East are also fueling consumer price pressures. The escalating conflict between Israel and Iran—particularly fears over the potential closure of the Strait of Hormuz, a critical shipping lane through which 20 percent of the world’s oil supply flows—has added to inflation anxiety. Following Israel’s June 13 attack on Tehran, the price of crude oil surged 13 percent to $77.18 per barrel, though it has since eased to around $74.
KPMG’s Swonk projects that a temporary oil price spike to $85 per barrel, followed by a pullback to $74, could lift global inflation to 4.1 percent in 2025. That’s up from her previous forecast of 3.7 percent, which had already accounted for expected tariff impacts. “Consumers are going to feel the impact soon,” she said.
Because of the new tariffs, markets have lowered their expectations for interest rate cuts this year. That’s frustrated President Trump, who’s been openly critical of Powell and is pushing for immediate cuts. Still, investors expect fewer rate cuts this year than they did before Trump was re-elected.
Meanwhile, speculation is growing that Treasury Secretary Scott Bessent—an influential macro investor and key architect of the administration’s economic strategy—could be tapped to succeed Powell when his term ends next year.