How tariffs play with inflation expectations

Market watch: The Fed building in Washington. The good news for the central bank is that, even with tariffs boosting expectations of inflation this year, surveys and market-based measures generally expect the boost to be temporary. — AFP

AS early signs emerge that tariffs will drive up prices, the US Federal Reserve (Fed) faces a crucial question: Will tariff-induced inflation be short-lived, as the level of prices adjusts to the higher tariffs, or will it persist, as a series of feedback loops lead to further price increases?

One feedback loop that the Fed is always on guard for is longer-run inflation expectations becoming “unanchored” – that is, the rate is not expected to remain stable.