Tariffs back in focus as cooling inflation only goes so far for markets

US stock markets have faded a higher open on Wednesday and volatility is picking up, even though the February CPI report saw a moderation in price growth compared to January. The headline rate moderated to 2.8% from 3%, and the core rate also slowed to 3.1% from 3.3% in January.

As we progress through Wednesday, the focus is back to tariffs and global trade wars. The EU announced EUR 26bn of retaliatory tariffs on US imports, while Canada has announced counter tariffs on approx. CA $30bn of US made products, which includes steel as well as other goods. The swift push back from the EU, and especially Canada , has eroded sentiment in stock markets. The S&P 500 has given back early gains, and less than 130 companies are rising on Wednesday. The Nasdaq has also lost ground this morning. The Magnificent 7 are holding onto gains for now, Tesla is higher by 6% and Nvidia is up by more than 5%, which is propping up the Nasdaq and is the reason why it is outperforming the S&P 500, so far on Wednesday.

CPI impact fades as growth fears resurface

There is fear that a global trade war will push up prices just as the disinflation process has taken hold in the US and Europe. Also, growth risks abound, with the Atlanta Fed GDP Now predicting Q1 GDP coming in at -2.4%. The risk to future growth is one of the reasons why the impact of today’s lower than expected CPI report failed to have  a big impact on market sentiment.  

Even though tariffs could upend the global disinflation trends, the details of the February CPI report are worth noting. The shelter index accounted for nearly half of the increase in inflation, which has been the prevailing trend for a years. However, there were some powerful forces outside of the shelter index that weighed on price growth last month. The CPI report also included a 4% decrease in airline fares and a 1% decline in gasoline prices. New vehicles also saw a price decline last month, while used cars and medical care saw small increases in their indices.

Although shelter costs rose at a 4.2% YoY rate, this was the smallest 12 month increase since December 2021. This is encouraging and suggests that inflation is softening. There is also a chance that inflation could moderate further next month, as signs of weak consumer sentiment weighs on price growth.

Tariffs and inflation – the silver lining

CPI in the US has been driven by core services for well over a year. Core goods prices have mostly been negative since January 2024, and have been trending lower since mid-2022. Since tariffs so far have been attached to goods, we can assume that goods price inflation will rise on the back of this in the coming months. However, tariff-related inflation is coming from a low base, and if companies do not pass on all the impact of the tariffs, then the CPI rate could see less of a body blow from Trump’s tariffs. We will need to see how they progress, if tariffs are in place for the long haul then prices will have top go up, but the impact may not be felt immediately due to the deflation in goods prices in recent years.

Wednesday was meant to be a good news day, after all there was a lower-than-expected CPI report and President Putin said that he would consider a truce with Ukraine, only if it is on his terms. It’s unlikely that there will be a perfect peace deal between Ukraine and Russia, but this was a step in the right direction.

However, tariffs have once again stolen the limelight. This is bad news for stocks, but it is good news for gold. The gold price is higher by more than $11 so far today and is extending gains as we move through Wednesday. The dollar is also rapidly giving up gains, as sentiment towards the US is drained by Trump’s scattergun approach to tariff policy, retaliatory actions by the EU and Canada and the prospect of what a global trade war will mean for the world economy and financial markets.