Shmid warned that “while in theory, tariffs may have only temporary effects on inflation (although persistent effects on the level of prices) I would be hesitant to take too much solace from theory in this environment”. He tied recent tariff announcements to broader signs of economic stress, including “a decline in consumer sentiment and increases in near-term inflation expectations.” Schmid acknowledged that the current policy environment has become “considerably more complicated,” citing feedback from business contacts who see growing risks on both sides of the Fed’s dual mandate of maximum employment and stable prices.

Schmid’s skepticism around transitory inflation contrasts with recent remarks from Fed Chair Jerome Powell, who has leaned into a more reassuring message about the persistence of tariff-driven price pressures. In “Jerome Powell’s Fed Deftly Maneuvers Through a Stagflationary Minefield“, I admired Powell’s effectiveness in navigating a difficult policy landscape, but I also pointed out the problematic use of “transitory” to describe inflationary effects. Powell argued that “it can be the case that it’s appropriate sometimes to look through inflation if it’s going to go away quickly without action by us… and that can be the case in the case of tariff inflation.”

That assertion paralleled Treasury Secretary Scott Bessent’s line that tariffs are a “one-time price adjustment.” But as I wrote in “The Sleight of Hand Behind the ‘One-Time Adjustment’ and ‘Transitory’ Tariff Inflation Narrative“, for inflation to be transitory, expectations for price levels would need to revert after the initial tariff shock. Yet, “tariffs make price reversion unlikely by locking in a permanently higher cost base.” In that piece, I also pointed out how structural effects – such as wage responses, supply chain disruptions, and embedded cost pass-through behavior – make inflationary pressures from tariffs more persistent. Outcomes are also hard to anticipate as inflationary pressures cascade through the economy.

Schmid appears attuned to these systemic effects. He described “a marked increase in the upside risks around inflation along with elevated downside risks to the outlook for employment and growth,” and openly questioned the prudence of discounting these risks as fleeting. Unlike Powell, who focused on optionality and emphasized that longer-term inflation expectations remain anchored, Schmid directly acknowledged that business sentiment and price expectations are shifting in ways that could prove difficult to reverse.

Powell’s message was strategically designed to preserve policy flexibility and calm markets in the face of stagflationary fears, and in that moment, Powell succeeded. However, I remain concerned that Powell’s framing underestimates the lasting damage that tariff-related cost increases can impose on the economy. As I wrote in my critique, the idea of a “one-time adjustment” may be statistically correct but economically misleading. A new, higher price level, once established, may not simply fade away. The higher price level could reshape business behavior and household expectations for years to come.

Schmid seems to understand these risks. His closing words underscore the seriousness of the moment (emphasis mine): “With renewed price pressures likely, I am not willing to take any chances when it comes to maintaining the Fed’s credibility on inflation.” That statement signals a shift away from the complacency that defines the transitory inflation narrative on tariffs.

The Last Friendly Report on Inflation?

As the Fed slowly accepts increased inflationary risks in the future, the past provides fleeting reasons for optimism on inflation. While I have stuck by the persistent and sticky narrative on inflation, March’s CPI (Consumer Price Index) report signaled the potential start of the next leg down for core inflation…just in time for tariffs to pressure inflation upward again. From the report:

“The index for all items less food and energy rose 0.1 percent in March, following a 0.2-percent increase in February. Indexes that increased over the month include personal care, medical care, education, apparel, and new vehicles. The indexes for airline fares, motor vehicle insurance, used cars and trucks, and recreation were among the major indexes that decreased in March…

The all items less food and energy index rose 2.8 percent over the last 12 months, the smallest
12-month increase since March 2021.”

Notably, the shelter index was up 4.0% year-over-year.

The chart below suggests that, absent tariff inflationary pressures, core CPI would finally be on its last leg lower toward the Fed’s 2.0% target.

Ironically, this positive development in core CPI could give more confidence to policymakers in pressing forward with inflationary tariffs.

Bostic Concurs

In an interview on Marketplace, president and CEO of the Federal Reserve Bank of Atlanta, Raphael Bostic, appeared to concur with Schmid’s concerns:

“I think the pressures that are out there are not the best for our mandates. All the models say that the introduction to tariffs is going to put upward pressure on prices, and I’ve seen more reports of recession fears in the media and from our business contacts than I’ve heard in a year and a half or two years. And so that’s also going to put pressure on our mandate, the employment mandate, in a way that is not positive.”

Bostic’s tiny source of solace is that “the current environment today might not be the current environment tomorrow.”

Currency Correction

Typically I conclude these inflation reviews by teasing out some implications and impacts in currency markets via the U.S. dollar. This time around, there are too many tariff-related cross-currents and too much economic chaos to directly connect dots. So, instead, I take this time to describe a “currency correction” I had to make on the Canadian dollar (USD/CAD) and the Mexican peso (USD/MXN).

A month ago I explained:

“I am short USD/MXN out of a belief that economic relations with Mexico are about as bad as they can get. I could of course get proven wrong in due time. On the other hand, I am long USD/CAD because I do not think the market fully appreciates how much weaker the Canadian economy will get as it tries to match the U.S. in this economic warfare.”

I was correct for almost two weeks, but in due time I have been proven wrong. I have now closed out both trades in order to reassess my next moves. Surprisingly, the Canadian dollar has proven quite strong against the Mexican peso. The exact opposite of my expectations. That chart below shows how CAD/MXN is breaking out from an approximate triangle or wedge type pattern.

Even more importantly, USD/CAD has broken below a key support level at the same time the U.S. dollar looks poised for a fresh, major breakout against the Mexican peso. In other words, in the last 2-3 weeks, I could not have been more wrong! (Note how the 25% tariff on Canada and Mexico defined a PEAK for USD/CAD, a classic contrarian move).

While USD/CAD broke support at its 200-day moving average (DMA) (the blue line), USD/MXN HELD 200DMA support. Thus, USD/MXN looks likelyly to head even higher while USD/CAD looks likely to head even lower.

This currency correction took me by surprise. The move likely reflects the effectiveness and the robustness of Canada’s current resistance to U.S. economic warfare. Mark Carney, the new Prime Minister of Canada, has been quite clear in laying out a framework of Canadian resistance. The Governor of the Bank of Canada, Tim Macklem, has been similarly forthright in laying out the implications for monetary policy and bracing Canadians for the economic warfare ahead. Apparently, both men have, so far, succeeded in bolstering Canada’s defenses (symbolically through the Canadian dollar). The implications for inflation both here and in Canada remain to be seen as trade slows down between the two North American neighbors and former allies.

Be careful out there!

Full disclosure: no positions

The post Inflation Concerns Rise at the Federal Reserve Amid Tariff Unease appeared first on Inflation Watch.

However, a systemic perspective greatly weakens claims of a one-time adjustment. Over time, tariffs can create a cascading effect through the economy, especially when tariffs are broadly applied across a wide swath of goods and services. Over time, tariffs can embed and entrench inflationary pressure in the economy from the following:

• Wage pressures – workers may demand higher wages to compensate for persistently higher consumer costs.
• Supply chain adjustments – companies may shift to more expensive domestic or alternative suppliers.
• Cost pass-through effects – producers adjusting pricing behavior in response to permanently higher costs as they enjoy greater pricing power amid a reduction in alternatives.

Moreover, successive rounds of tariffs, as the economy is experiencing now, amplify inflationary ripple effects, making them harder to unwind.

Still, that one-time adjustment is higher and persistent. So I am skeptical as Bessent also tries to resurrect “team transitory” when explaining the impact of tariffs. For inflation to be transitory, price levels would need to revert after the initial tariff shock. Tariffs make price reversion unlikely by locking in a permanently higher cost base unless offset by productivity gains, currency shifts, or supply chain innovations. Again, all else being equal, as long as the tariff is in place, someone is paying the cost, this year, the next year, and so on. The price increase will not disappear on its own accord. If you are still complaining about how much higher prices are now compared to 2019, you will find yourself complaining years out about the higher prices brought on by tariffs passed on to the consumer level.

Can pandemic-era inflation be described as a one-time adjustment? Of course. All we need to do is extend the time period over which “one-time” applies. The chart below shows the year-over-year change in the average annual CPI. Even if inflation slows to its pre-pandemic pace by 2026, the accumulated price increases remain, permanently raising the cost of living (of course, I have my doubts about the pace of inflation’s decline given the underlying stickiness of key inflationary components). In 2027, a casual observer could look back and conclude this inflationary era was a one-time price adjustment that lasted about 5 years. While the conclusion would be technically correct, the broad price level remains significantly elevated, straining household budgets long after the inflationary event passes. In other words, a “one-time adjustment” in this context is only academically meaningful.

Source: U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items Less Food and Energy in U.S. City Average [CPILFESL], retrieved from FRED, Federal Reserve Bank of St. Louis; March 7, 2025.

Terms like “transitory” and “one-time adjustment” do not speak to the direct and real-time impacts on consumers. These terms are sleights of hand to convince financial markets to look through the price dynamics. Consumers cannot look through these impacts. They must immediately adjust spending habits to account for the deterioration in spending power from tariffs, especially broad based ones (all else being equal).

Adjustments and Transitory Effects In Currency Markets

In foreign exchange, the Canadian dollar and the Mexican peso have served as ground zero for the current chaos over ever-changing policies on tariffs and economic warfare. However, overall, against the U.S. dollar, these currencies have stuck to a well-defined trading range. Against the U.S. dollar, the peso was trading at these same levels four months ago with a 5% trading range from bottom to top (excluding outliers). Against the U.S. dollar, the Canadian dollar was trading at these same levels three months ago with a 2.6% trading range from bottom to top (excluding outliers). On the biggest single-day of volatility, the day tariffs were delayed for a month right before they were scheduled to take effect, USD/MXN traded through a 4.7% range and USD/CAD traded through a 2.8% range. In other words, both currencies covered their entire range of volatility in one day.

These percentages are large in foreign exchange. The adjustments can be seen in the persistently elevated levels for both USD/MXN and USD/CAD. There is no transitory observation until the volatility dies down and/or the price adjustment itself reverses. In the meantime, I am short USD/MXN out of a belief that economic relations with Mexico are about as bad as they can get. I could of course get proven wrong in due time. On the other hand, I am long USD/CAD because I do not think the market fully appreciates how much weaker the Canadian economy will get as it tries to match the U.S. in this economic warfare. Combined, these two trades are good pair trades where I collect interest income from USD/MXN as I wait. Week-to-week volatility in USD/CAD allows me to execute a few swing trades.

Epilogue

Last week I spent more time understanding the economic theories and frameworks espoused by Bessent. The interview at the Economic Club of New York with Larry Kudlow was educational in that respect. Unfortunately, the recording started after the commentary on tariffs. Minus the cheap shots, the rest of the interview is worth watching and understanding.

Be careful out there!

Full disclosure: long USD/CAD, short USD/MXN

The post The Sleight of Hand Behind the ‘One-Time Adjustment’ and ‘Transitory’ Tariff Inflation Narrative appeared first on Inflation Watch.