Why Our Aggregate Pricing Outlook Holds Despite Tariff Headwinds

We receive many client questions on why we are not changing our aggregate pricing outlook despite the imposition of tariffs. The short answer is that our research shows the disruptive effect of tariffs – artificially increasing economic or pricing activity in certain segments of the economy and decreasing in other segments – is far greater than the aggregate effect.   

For the longer answer, we will dive into the latest US Consumer Price Index, or CPI, report. The CPI through May showed a 2.4% increase compared to May 2024. Within the headline figure, however, are wildly disparate trends. The April-to-May increase of 0.2% was normal, as were the preceding few months’ worth of month-to-month changes. The normality is a function of the supply chain pressure being roughly neutral on an overall basis; that is, supply and demand, in aggregate, are reasonably balanced, as we can see from the Global Supply Chain Pressure Index we track. 

That overall normality obscures wildly disparate trends within the components. For example, consider these segments that are seeing deflation in consumer prices over the last 12 months: 

• Airline Fare Prices are down 7.3%.  
• Gasoline Prices are down 11.4%.  

These segments are seeing little price movement over the last 12 months: 

• New Cars are up 0.6%. 
• Dental Services are up 1.3%. 

Finally, these segments are seeing inflation considerably in excess of the aggregate 2.4% inflation: 

• Beef Prices are up 8.6%. 
• Electricity is up 4.5%.
• Housing is up 4.0%.

Why is this so? Let’s consider supply, demand, consumer behavior, global context, interest rates, and more.

• Airline prices are weak, as weak demand by consumers in the face of economic uncertainty coupled with low fuel prices means input costs and demand are low. 
  
  
• Fuel prices are low because global oil demand is low, stemming from the economic uncertainty of the trade war. 
  
  
• New car prices, despite supply constraints, saw a noticeable bump in February through April, but declined 0.2% in May as consumers sought to buy early in advance of tariffs, a classic example of tariff distortion. 
  
  
• Dental services are another item perhaps being postponed as budget-conscious consumers prioritize essentials.
  
  
• Beef prices are high given low herd volumes as farmers struggle with high input costs and interest rates. As a counterpoint, pork and chicken – with their lower cost to raise – are seeing much more modest increases in prices over the last 12 months, at 0.6% and 2.4%, respectively. 
  
  
• We have shortages of housing (given the limited supply of homes built post-Great Recession) and electricity (given persistent underinvestment in capacity and surging demand with AI-driven power consumption). 

In summary, we are seeing the consumer pivot toward essentials and away from discretionary goods, increasing demand in certain segments and decreasing it in other segments. Through it all, the US consumer has been remarkably adept at maintaining a relatively constant flow of spending despite all the changes in trade policy, economic uncertainty, and more; US Total Personal Consumption Expenditures have grown between 5.3% and 5.8% over each of the last 12 months. 

Our CPI forecast – which we prepared with March 2024 data – called for first quarter 2025 prices to be up 2.6% versus the first quarter of 2024. Actual prices were up 2.7%. Our forecast looks to be similarly accurate for the second quarter, and leading indicators such as the rise in bond market inflation expectations continue to support our forecast for building inflationary pressures in the second half of 2025 and into 2026. We are keeping the forecast in place. 

The takeaways we hope you have are threefold: 

1. We had been expecting inflation to build in the second half of 2025 and into 2026 pre-tariffs. That has not changed at the macroeconomic level, as consumers and the economy have a remarkable ability to balance out disruptions by reprioritizing resources toward essentials and away from the less essentials in times of uncertainty. 

2. The microeconomic effects are certainty varied; know your market’s pricing trends. 

3. While we have not changed our Consumer Price or Producer Price forecasts given the first takeaway, we have changed several specific pricing outlooks, such as our Oil Prices forecast, given the second.